ETSY: More than a Pandemic Company

Etsy, Inc. (ETSY) has been a victim of the macro sell-off. It was easy to say when ETSY was touching the $300 price range that it was expensive, however, buying the stock now at $115 is a steal. From this, I am bullish on ETSY. 

Post-Pandemic Conditions

Many saw ETSY as a pandemic stock, benefiting from international lockdowns. However, the majority of lockdowns in ETSY’s operating regions have been lifted, leading many to believe the ecommerce firm should now struggle.

However, ETSY is more than a pandemic era company. Q3 and Q4 2021 still saw strong growth despite business having already returned to a pre-pandemic trends. 2021 still saw 35% revenue growth and 41.3% net income growth year-over year. These figures are following the absurd 2020 growth, which came in at 128.7% for revenue and 374.7% for net income. So, ETSY clearly benefited from pandemic economics, but also has not given back the ground like some companies have.

Further, both the amount of sellers and buyers increased in 2021. Sellers increased to 5.3 million, a 29% increase, and buyers increased to 90 million, an increase of 11%. 

Revenue and net income expansion is outpacing buyer growth significantly, meaning ETSY consumers are spending more on the platform than the previous year. In absolute terms, the average consumer contributed $25.88 of revenue in 2021 up from $21.30 in 2020. 

Revenue contribution should continue to rise in 2022, as ETSY is hiking its transaction fee to 6.5% from 5.0%. Some seller backlashes have occurred, including 23,000 (0.4% of total sellers) signing a petition against the hike. Although 0.4% of sellers are immaterial, the higher fees could reduce how attractive the platform is to new sellers compared to the competition.  If 2021 sales were to remain constant, the fee hike would increase revenue and net income by $200 million.

With 2021’s strong growth, it is safe to say ETSY does not have a pandemic lockdown reliant business model.

Macro Headwinds

The prevalent macro theme of 2022 is inflation. The U.S. had 8.5% headline inflation for March, causing consumer anxieties to climb.

Inflation is generally countered by central banks tightening monetary policy leading to economic contraction. Raising interest rates is the tool of choice for central banks. As interest rates rise, raising capital in both debt and equity becomes more expensive. 

Luckily for ETSY, they are impacted less than other companies as their operations are asset light. ETSY needs to invest little compared to other retailers, as they do not operate fulfillment centers or manage shipping logistics. The small capital footprint allows ETSY an easier time to weather the ebbs and flows of the economic cycle.  

ETSY has notable cash reserves as they have issued $1B of bonds during the near 0% interest rate regime. The main usage of this issuance was for share repurchases which could be a continued catalyst to prop up the share price. However, in the unlikely scenario of a severe recession, ETSY can use its cash reserves as an operational buffer. 

The risk of holding debt is that if the interest rates are still heightened and ETSY needs to roll the debt, the result is that the firm will need to pay the higher rate. 

Goldman Sachs analysts believe there is a 38% chance of recession in the next 24 months. The majority of ETSY products are consumer discretionary. Consumer discretionary is generally impacted considerably by recessions as consumers cut back on spending. 

The average recession lasts 1.5 years, the longest being the Great Depression lasting 3.6 years. So, a year and a half of reduced growth would be the likely recession scenario for ETSY. Compared to many other high growth companies, the risk of reduced growth is a mild downside compared to the potential defaults other companies would face.

ETSY’s industry is known for its cyclical resilience, but the small capital footprint offsets the major impacts of a recession. 

The Talk on Wall Street

Turning to Wall Street, ETSY earns a Moderate Buy rating based on ten Buy and four Hold ratings assigned over the last three months.

The average ETSY stock price target of $193.86 implies a 67.42% upside potential.

ETSY has become oversold during the recent selloff, and additionally, it is more resilient to a recessionary environment compared to other growth companies. I agree with Wall Street, ETSY is a Buy. 

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