Etsy Deep Dive

We just released our latest report on Etsy! Some background on it below. 

Robert Kalin felt there had been a multi-century war against the individual craftsman. The unrelenting drive of standardization and mass production kicked off by the industrial revolution centuries ago had driven consumers away from carefully crafted, unique goods into the throws of homogeneity, distant supply chains, and cheap products. Kalin founded Etsy as a counterweight to the “capitalistic” tendencies to push the small artisan into the shadows of the economy. Kalin didn’t want to build a mission-focused business; he wanted to start a revolution in how goods were distributed.

As a handmade-only marketplace, Etsy attracted hundreds of thousands of small sellers and the platform quickly became an important source of sales for them. Consumers would come to love the wide assortment of idiosyncratic and handmade items, but it was becoming clear that the success of Etsy was hampered by the ideological fixations of a founder who at times was more concerned about creating a modern guild system or teaching blacksmithing classes than helping sellers sell. Kalin’s theories on how the economy should be restructured were shattered by a simple reality: Etsy was just a “handmade eBay”, and one that was nearing the fate of becoming the “next eBay”, which meant stagnating growth and an unclear direction.

Kalin would be ousted—twice.

The new regime, led by Josh Silverman, would balance Etsy’s mission with sound business judgement. He restructured the entire business, reducing headcount and reassigning >80% of employees to new jobs. He reformulated the Etsy value prop from “handmade” to “special”, noting that handmade is not a purchase occasion. Etsy’s woeful profitability profile was quickly reversed under Silverman, and he simultaneously reinvigorated growth. A few years later, Covid hit, and the site boomed, growing well over 100%.

Silverman has proved to be a competent operator, pulling Etsy from a teens growth rate that was trending lower up to a ~35% revenue CAGR since his tenure started in the middle of 2017. But he has had his mistakes too, making two acquisitions at the peak of the 2021 stock market valuations that have since recorded impairments of over $1bn. And Etsy faces unique challenges today: buyers love Etsy, but don’t shop on the site often. Almost half of all buyers only buy an average of once every two years. Can Etsy figure out how to increase buyer frequency and cross-category purchases?

Their stock appreciated almost 400% during 2021 and now is down 80% from the peak, sitting at the same price the market valued it at pre-Covid. This is despite adding almost 50mn new buyers and more than doubling GMS. At today’s enterprise value, and with ~$400mn of FCF, they trade at a ~4% FCF yield. But that is inclusive of product development and S&M expenses that have increased by several hundred million dollars since 2020. Could this material increase in expenses yield no business improvement?    

In this report, we go through the various courses of action Etsy has taken to address their frequency problem—or opportunity—and show how it has impacted frequency with our buyer analysis. Our 79 page report also sheds more light on Etsy’s tumultuous history, competition, management, and value prop, as well as dovetails into their revenue model with our take-rate analysis and their valuation with our mature earnings and reverse DCF analysis.

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 Also, if you haven't seen it already, we recently launched a podcast, The Synopsis, which you can follow here (Apple, Spotify). We will be covering Etsy on it soon! 

Table of Contents

1. Founding History.

2. Business History.

   1. From Brooklyn to Wall Street.

   2. The Silverman Turnaround.

3. Business.

   1. Marketplace Revenue.

   2. Services Revenues.

4. The Etsy Value Prop and Frictions.

   1. Marketplace Frictions.

5. Competition.

   1. Seller Competition.

   2. Buyer Competition.

6. House of Brands.

   1. Reverb.

   2. Depop.

   3. Elo7.

7. ROIC and Capital Allocation.

8. Revenue Build and Valuation.

9. Risks.

10. Summary Model.

    1. Historical Model.

    2. Financial Model.

11. Conclusion.