Etsy Inc. is an online platform that connects buyers and sellers of craft, handmade, and vintage goods. The company will go public under the ticker “ETSY” on the NASDAQ with a vague Etsy IPO date of “as soon as practicable” according to its SEC filings.
Underwriters are expected to help Etsy raise 16.6 million shares. The Etsy IPO price of shares expected is between $14.00 and $16.00 a piece. At the high end, that’s only $260 million.
Looking into the details surrounding Etsy’s initial public offering (IPO), I don’t see what the hype is all about.
Etsy IPO: The Business Plan
Etsy is the equivalent to an organic whole foods store in an online grocery business. The company aims to stay away from selling mass-produced, generic products, instead targeting consumers who want handcrafted goods that are produced in a responsible manner.
A focus on responsible consumers and creative entrepreneurs has paid off in growing the ecosystem. Active sellers have grown at 28% on average since 2012, while active buyers on Etsy rose from 9.3 million in 2012 to 19.8 million in 2014. (Source: Securities and Exchange Commission web site, March 4, 2015.)
The 19.8 million active buyers can purchase anything from art to pet collars, unique brooches, vintage clothing, and much more. Given gross market sales totaled $1.9 billion in 2014, buyers spent around $96.00 annually and sellers sold $1,400 per year. Given that Etsy wants to retain a niche spot in the commoditized online retail world, these user figures are too small.
Etsy generates revenues, which grew an impressive 62% per year on average since 2012, by charging sellers various fees. Sellers pay a fee per transaction and per item listing. They can also pay a fee for higher rankings in search results. Etsy also gains two percent of its revenues from payment processing.
Yes, the statement in the SEC filing that reads “We make money when Etsy sellers make money” may be true, but it hasn’t translated into profits.
Etsy Goes Public: Costs Too High?
Last year, Etsy had a gross profit margin of 62%; the results have been similar in previous years. Where the online craft goods marketplace gets into trouble is with operating expenses.
The amount Etsy spends on operating expenses, like marketing and product development, has been too high, preventing any profits. Let’s not forget that Etsy will spend more as a public company to cover the costs of additional hiring, marketing, development, and legal matters.
Poor historical financial results aren’t always important to investors, as a firm’s stocks tend to trade on the prospects of future earnings potential. Here, too, I think Etsy does not live up to the task.
Etsy’s Growth Prospects
Some analysts have noted that Etsy is not an eBay Inc. (NASDAQ/EBAY) or Amazon.com, Inc. (NASDAQ/AMZN), but that it’s a successful niche player. Yes, Etsy is a small player, but from where I sit, it has too many steep hurdles to pass in becoming a successful niche player.
The online retail industry is far too competitive. While Etsy’s value proposition is unique, it doesn’t carve out a defensible position longer-term. For example, two behemoths in the industry, eBay and Amazon.com operate global marketplaces that generated $17.0 billion and $89.0 billion, respectively, in revenues for 2014. (Source: Morningstar web site, last accessed April 9, 2015.) Last year, Etsy’s revenues totaled $195 million—that’s roughly one percent of eBay’s total and 0.2% of Amazon.com’s amount.
Yes, you likely won’t find a Viking knit kit selling for $40.00 or a vintage handmade all-leather handbag for $140.00 selling on the competition’s web site. But then again, you might. What’s to stop sellers on Etsy from creating an online storefront on eBay or Amazon.com, or even selling from their own web site? Nothing. It just makes perfect business sense.
Etsy IPO 2015: The Verdict
Looking at Etsy’s intended use of IPO proceeds can give us a glimpse into what it may feel like to be a shareholder. The SEC filing reads, “The principal purposes of this offering are to increase our visibility, create a public market for our common stock… [and] use $300,000 of the proceeds to partially fund Etsy.org, a Delaware non-profit organization.” (Source: Securities and Exchange Commission web site, March 4, 2015.)
In essence, Etsy is using the IPO as a marketing campaign and to meet corporate social responsibility targets, like funding its charity. While the corporate values of Etsy are admirable, they have not translated into profits and likely won’t materialize into returns for shareholders.
As Etsy grows in size, following its initial public offering, its operating costs will rise concurrently. More spending is a must to expand globally and to compete with online retail giants. This leaves me of the opinion that the Etsy community isn’t sustainable long-term and investors shouldn’t hold their breath in anticipation of future profits—they’re not coming. However, fundamentally focused investors should note that tech companies, especially IPOs, often trade higher in the face of losses or reason.