- Niche marketplace, Etsy, is planning to go public sometime this quarter.
- Etsy has high growth rates in the number of registered users, items listed, and gross merchandise sold.
- The company has been reportedly profitable since 2009 and is constantly looking for additional revenues.
- Etsy's low valuation coupled with high revenues and operating profits make it an excellent investment alternative.
Etsy is set to join the list of hot tech IPO's of 2015. The online crafts marketplace is reportedly planning to hold its IPO this quarter. Unlike Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY) or Alibaba (NYSE:BABA), Etsy does not offer a wide variety of goods on its platform, but specializes in handmade crafts, arts, and vintage items. Etsy was founded in 2005 and has gained 43.9 million users to date, with more than 1.2 million active shops.
Etsy’s main revenue comes from transactions and listings fees. Etsy charges sellers a fee of $0.2 to list a single item for four months and an additional 3.5% of each item sold. Etsy's revenues and user base grew quickly (as will be discussed later), and they started looking for other revenue streams. The first new stream that Etsy turned to was advertising.
At the end of 2009, Etsy completed its first acquisition, acquiring Adtuitive that develops contextually-driven ad platforms for retailers. On September 2011, Etsy launched its first advertising platform, which was search-based and enabled sellers to promote their shops through specific search words. On September 2014, Etsy replaced its search ads platform with a promoted-listings platform where sellers can promote their merchandise in a contextual method, probably based on the Adtuitive acquisition.
In 2012, Etsy introduced its payment processing service that competes with eBay’s PayPal and has created a new revenue stream for the enterprise. Given that as of eBay Q4 earnings, PayPal revenue has increased 28% year over year and has contributed well to eBay revenue, this is a good move by Etsy. The company charges 3.5% + $0.25 for every payment that goes through the direct checkout mechanism that enables sellers to process credit and debit cards directly through Etsy and prevent buyers from leaving the site to complete their purchase. Etsy’s payment processing service directs users from PayPal to its internal service and drives more revenues from every sale made on the site.
The Etsy community is growing rapidly, as presented by the three operational indicators in chart 1 below. As shown in the chart, the user base is continuously increasing even as the number of listed items increases and the gross merchandise value has soared.
The increase in the number of items listed and the number of new users indicates how the Etsy phenomenon is rising and receiving more attention with time. The 31% annual increase in new items listed and 72% annual increase in gross merchandise value sold on Etsy are driving an equivalent increase in listings fees and transaction fees collected by Etsy.
According to Etsy’s CEO, Chad Dickerson, the company has been profitable since 2009 and following the steady increase in revenues and the light operating expenses business model, it's no surprise. Most of Etsy’s revenues are generated with low costs. Transactions and listing fees are generated passively, thanks to Etsy's successful platform, and even though the company constantly invests in its product development, the marginal cost for every sale is very low and drops as the number of transactions increase. However, Etsy’s fees are flat, and as the community increases, Etsy’s revenues rise and so does its operating margin.
Etsy’s move to offer an internal payment processing service allows buyers to remain on the site during checkout. However, it also enables Etsy to gain the payment processing revenues that would otherwise have gone to PayPal. The third revenue stream, Etsy’s advertising service, is based on its recent acquisition, as mentioned above, and yields a high margin by nature.
As mentioned above, Etsy grew its user base and the gross value of merchandise sold each quarter while adding new revenue streams to boost its top line. As shown in chart 2 below, Etsy revenue grew at an incredible 72% annual rate, and advertising and payment processing increased by almost 80% year on year. Transaction and listings fees that accounted for 55% of revenue grew by 60% year over year.
Funding and Valuation
Etsy raised $98 million in six funding rounds, mainly from June 2006 to May 2014, as shown in chart 2 below, and the company’s valuation increased in each round, up to $688 million in round F. Early shareholders include leading venture capital funds such as Index Ventures, Accel Partners, and Union Square Ventures.
Etsy has a relatively low valuation, and together with its high annual revenues, the company presents an impressive 4.22 P/S ratio. Etsy’s ratio might be higher than eBay price to sales ratio of 3.71 or Amazon’s 1.63, but for a small Brooklyn-based start-up, it is amazing. Etsy has a better P/S ratio than some of the tech giants, such as Google (NASDAQ:GOOG) with 5.29, or Yahoo (NASDAQ:YHOO) with 9.12, and has a much better P/S ratio than the recently IPO’d Box (NYSE:BOX) with a P/S ratio of 11.66, making Etsy an attractive investment.
The crafts marketplace, Etsy, is expected to go public this quarter. Etsy has phenomenal growth rates in its user base, gross merchandise value sold, items listed, and total revenues. In addition, the relatively low valuation the company received in its latest funding rounds reflects a very attractive revenue multiple for the company. Etsy’s impressive growth rates, operating profits, and decent valuation make this IPO very attractive for investors. Once Etsy files its official S-1 with the SEC, I will revisit my thesis.
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