Etsy Inc. (ETSY) is the fourth most visited e-commerce site in the US, but unlike its price-driven competitors, it has carved out a competitive niche focusing on handmade, vintage, and customized goods. This strategy is a key competitive advantage, allowing Etsy to avoid the "race to the bottom" behavior that continues to pressure broader e-commerce, advises Tom Hayes, editor of HedgeFundTips.
CEO Josh Silverman is a jockey worth betting on. He's a proven winner with a track record of success at eBay Inc. (EBAY) and Skype, where he added 300 million new users, doubled revenues, and tripled profits. Silverman turned Etsy around in 2017 when the company faced activist pressure and profitability challenges. We see this time as no different.
Etsy was a major beneficiary of the pandemic e-commerce boom, but has since fallen over 80% to price levels not seen since 2018. The difference? Revenues are up 4.5x, EPS is up 4x, and margins have expanded. Investors continue to treat Etsy as a "show me story," fixated on when the company will return to stronger growth.
We believe this ignores the strong underlying fundamentals and cheap valuation, missing the forest for the trees. Keep in mind: Etsy has largely retained its pandemic-related gains, with GMS of $13.16B in FY2023 compared to $13.49B in FY2021. This includes recovering from pandemic-driven sales, such as the ~$875M in face mask sales from 2020-2021. This is key.
Growth catalysts remain underappreciated. Etsy launched "Gift Mode" to increase purchase frequency, targeting the $200B gifting TAM. Etsy holds just 1% of this market, and each 1% increase in share = a $2B GMS opportunity.
Etsy is also an undercover play on the residential housing market recovery, with over 35% of its sales coming from the "Home and Living" category. Longer term, international expansion (yields higher payment fees) and building awareness among men (~10% of current customer base) will be key growth drivers. In the meantime, as general consumer sentiment and macro improve, we expect Etsy to return to a mid-single-digit clip.
Management has a long track record of shareholder-friendly capital allocation, using >60% of FCF for share repurchases over the past six years, and recently announced a new $1B share repurchase program. We project a reduction of shares outstanding by 8% to 10% in FY2024 alone.
Etsy trades at just 13.1x forward earnings, a ~43% discount to the S&P500's 23x. Once it becomes obvious to the market that Etsy can achieve mid-single-digit top-line growth, the multiple will get a re-rating closer to the sector median of 18x. We believe modest multiple expansion, coupled with earnings growth, could push shares of Etsy to $100+ over the next two to three years.
