Etsy Inc: Niche E-Commerce Stock Doubled in Six Months; More to Come?

etsy stockA Fast-Growing E-Commerce Stock That’s Not Amazon

Over the past decade, the e-commerce industry has been growing rapidly, and the COVID-19 pandemic has only added fuel to the fire. When numerous brick-and-mortar retailers had to close during lockdowns, consumers had no choice but to go to online vendors.

And that means e-commerce platforms like Amazon.com, Inc. (NASDAQ:AMZN) were making money hand over fist. But Amazon, while being the most dominant player in the game, is not the only company benefiting from the pandemic-induced e-commerce boom. Smaller platforms are getting a piece of the action too.

Etsy Inc (NASDAQ:ETSY), for instance, is mostly known as a niche e-commerce web site focused on handmade items and craft supplies. As you’d expect, Etsy doesn’t have nearly as many product categories as Amazon, and it has a much smaller customer base. And yet, its shareholders have become some of the biggest winners in the recent e-commerce boom.

Take a look at the chart below. It shows that, in just the past six months, Etsy stock has more than doubled. And year-to-date, the company’s shares have returned a staggering 255%.

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That’s far superior to the performance of any benchmark index.

Etsy Inc (NASDAQ:ETSY) Stock Chart

Chart courtesy of StockCharts.com

What’s more is that Etsy stock has substantially outperformed Amazon stock. To give you an idea, AMZN stock is up about 67% year-to-date—certainly not bad, but not nearly as good as what ETSY shares have delivered in the same period.

As you’d expect from its soaring stock price, Etsy’s business has been firing on all cylinders.

According to its latest earnings report, the company generated $451.5 million of revenue in the third quarter of 2020, representing a 128.1% increase year-over-year. (Source: “Etsy, Inc. Reports Third Quarter 2020 Financial Results,” Etsy Inc, October 28, 2020.)

Etsy’s gross merchandise sales (GMS), a critical measure of an e-commerce platform’s performance, were $2.6 billion in the third quarter. That’s up 119.4% year-over-year.

One of the reasons people have tried out different e-commerce platforms this year was to buy protective masks—they were sold out at most vendors during the first few months of the COVID-19 outbreak. And masks were indeed one of the growth drivers for Etsy’s business.

But here’s the thing: even excluding mask sales figures, the company’s third-quarter GMS still improved 93% from a year ago. (Source: “Q3 2020 Financial Results,” Etsy Inc, October 28, 2020.)

In fact, Etsy saw GMS growth across the board. The table below shows the performance of Etsy’s traditional top six categories, excluding facemask sales.

Category Q3 2020 GMS  Year-Over-Year Increase
Homewares & Home Furnishings $772.0 Million 126%
Jewelry & Accessories $380.0 Million 61%
Craft Supplies $312.0 Million 114%
Apparel $254.0 Million 59%
Paper & Party Supplies $109.0 Million 37%
Beauty & Personal Care $84.0 Million 164%

(Source: Ibid.)

As you can see, each of these categories delivered substantially better results compared to the year-ago period. Even Paper & Party Supplies—which you wouldn’t think would do well during a global pandemic—experienced a 37% growth in sales.

The bottom-line number was even more impressive. In the third quarter, Etsy Inc’s net income came in at $0.70 per share, up 483% from the year-ago period.

Moreover, Etsy’s business gushes cash flow—a characteristic that’s not always found in the fast-changing tech world. In the first nine months of 2020, the company’s free cash flow increased 271% year-over-year to $431.2 million.

And if you’re wondering whether the uptrend in these figures can continue, take a look at the company’s guidance.

For the fourth quarter of 2020, Etsy’s management is projecting $2.7 to $3.1 billion in GMS and $459.0 to $513.0 million in revenue. Unsurprisingly, these numbers are well above last year’s fourth-quarter GMS and revenue of $1.7 billion and $270.0 million, respectively.

More importantly is the implied sequential comparison: even if Etsy Inc achieves the lower end of its guidance range, it would have improved both its GMS and revenue quarter-over-quarter.

Of course, the fourth quarter tends to be strong because of the holiday shopping season. But the guidance range does suggest that the company’s growth momentum could continue.

Analyst Take

The U.S. stock market recently got a solid boost due to news about effective COVID-19 vaccines.

Economic recovery is already underway, but I don’t think it’s going to be an overnight process. It will likely take several months to vaccinate everybody, and it could take even longer for physical retail stores to get back to their pre-pandemic sales levels.

All things considered, I’d say there’s still room for Etsy Inc to expand its presence in the e-commerce world. And that could be a reason for investors to keep liking Etsy stock.