Image Source: PixabayEtsy 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-led e-commerce boom, but it 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 $13.16 billion in FY2023 compared to $13.49 billion in FY2021. This includes recovering from pandemic-driven sales, such as the ~$875 million in face mask sales from 2020-2021. This is key. Growth catalysts remain underappreciated. Etsy launched “Gift Mode” to increase purchase frequency, targeting the $200 billion gifting TAM. Etsy holds just 1% of this market, and each 1% increase in share = a $2 billion 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 more than 60% of FCF for share repurchases over the past six years, and recently announced a new $1 billion 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.
About the Author
Thomas J. Hayes is the founder, chairman, and managing member of Great Hill Capital, LLC (a long/short equity manager based in New York City). Before starting his own firm, Mr. Hayes worked with Cornwall Capital, LP (one of the firms featured in The Big Short book and movie).On a weekly basis, he publishes his timely stock market commentary, Hedge Fund Tips with Tom Hayes videocast and podcast. He has a wide following in the investment management, hedge fund, and media community.More By This Author:Top Picks 2025: Avino Silver & Gold MinesTop Picks 2025: Ituran Location And Control Top Picks 2025: Franco-Nevada
