My Bullish Thesis on Etsy
CEO ("Josh Silverman")
He previously served as a member of the board at American Express, he was the CEO of Skype, and CEO of shopping.com. He also held various executive roles at eBay. Earlier in his career, Josh co-founded Evite, Inc. where he also served as the company's CEO. He currently serves as a member of the board of directors of Shake Shack.
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Who is Etsy and What do they do?
Etsy is an e-commerce website focused on handmade, vintage items and craft goods. Etsy connects sellers of handmade, vintage, and craft supplies to buyers of their products.
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How does Etsy Make Money?
The company makes money in two ways:
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Fees for listing items - For example, the transaction fee, commission, and processing fee.
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Seller services - Etsy charges to advertise seller's products, direct checkout, payment processing, and discounted shipping labels all generate revenue.
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The Bull Thesis
Niche Market
Handmade, vintage and craft goods are unique and are not the highlight of Etsy's competition. Although Etsy competes against large e-commerce companies like Amazon, Wayfair and Ebay, the products that Etsy sells are often made by smaller sellers with crafting talents looking to start or expand their business.
A survey run by the company revealed that 88% of buyers agree that Etsy sells items you can't find anywhere else. As a result, Etsy will continue to bring in new customers looking for the high quality, unique, personalized products that Etsy sells.
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Trusted and Established Platform
Although the sellers tend to be smaller localized businesses, people come to Etsy to find these types of personalized, unique, handmade goods because they know that they can find a large list of the types of products that they are looking for. Etsy boasts that 3.7 million active sellers and 69.6 million active buyers use its platform. In 2020 the company reported that active and habitual buyers increased by 104% and sellers also increased but by a less impressive amount.
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Incredibly Low Dispute Rate
Etsy reports a dispute rate of .3% which is much lower than the industry standard of 1%. However, dispute rate is different from return rate.
Return Policy/Rate - A search into Etsy's return policy reveals that Each seller on Etsy is responsible to establish their own policies regarding refunds, exchanges, and returns. Etsy's return rate is also one of the lowest in the industry at about 1.2% (Beating Ebay, 2.3% and Amazon, 3%).
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Lower Overhead Costs
Since Etsy merely operates the platform for connecting buyers of handmade goods to sellers it doesn't take on the costs of manufacturing, shipping, advertising or distributing the products listed on its platform. In fact, Etsy actually makes money by charging sellers to advertise on its platform.
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Rapidly Increasing Gross Merchandise Sales ("GMS")
In October of 2020 the company reported an increase in its dollar value of items sold in Etsy marketplace by 116% compared to October of 2019. This increase in sales contributed to an increase in revenues of 128% during the same period.
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COVID-19 and Masks
As an e-commerce platform, Etsy's business was helped by the COVID-19 pandemic. Sellers began manufacturing and distributing face masks which partially contributed to Etsy's revenue growth and sales. But masks were only a fraction of the story.
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Large and Growing Total Addressable Market ("TAM")
The ‘special’ or handmade/craft products market is worth approximately $100 B. However, the COVID-19 pandemic has accelerated the growth of the e-commerce sector. Etsy now estimates their TAM opportunity to be approximately $1.7 T.
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The Bear Thesis
Consumer Discretionary Sector
Etsy sells goods and services that are considered non-essential. The business model relies on consumers decision to support local, smaller sellers. The fact that Etsy's products are non-essential is a drawback albeit not a large one. The company is reporting growing revenues in a large and growing TAM.
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Competition
This isn't really a drawback. Etsy competes against larger e-commerce companies like Amazon, Wayfair, and Shopify. However, the competition is not really direct because Etsy focuses on a niche category of handmade, vintage and craft items.