Max Grigoryev
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Max Grigoryev in Fundamentality,

Etsy: handmade growth stock

Traders have been really negative regarding Etsy for quite a long time. The company's market cap has decreased 3 times since IPO. Among the reasons analysts usually name competition with Amazon and other huge marketplaces. Etsy keeps proving that the company has its own vision and uniqueness to compete and moreover to beat their large competitors. Here I want to show you why exactly Etsy is a great business right now. 

Business

If you want to get a better understanding of software business, you need to take a look at the company's operating and financial metrics. Unit-economics of such companies can usually tell you even more than their cash flow statement or balance sheet. If you for some reason don't know what Esty is doing - Etsy operates a marketplace where people around the world connect, both online and offline, to make, sell and buy unique goods. The most recent report that was issued by Etsy was their 10-Q report. As far as fiscal year for Etsy starts on January 1, the company announced its Q1 financial results ended March 31, 2016. 

First of all, let's check the top-line gross merchandise sales - it's up 18%. Etsy increased its GMS from $523M to almost $630M. Another important metric is a number of active buyers on a platform and therefore average revenue per each buyer. Tech companies usually don't provide such numbers, but Etsy does. Etsy increased its number of active buyers from 20M to 25M representing a significant 20% growth rate. 

As a short notice, when the company has double digit growth in customer base - it usually hurts average revenue per one account (per buyer in this case). Etsy's GMS per one buyer dropped by just 1.5%, which is a huge achievement. The company could keep its growing pace without losing money. Moreover, the company was able to increase the average revenue per each buyer from $2.81 to $3.27 which is 16% growth rate. 

Besides the marketplace, Etsy gets its revenue from a seller services. 

Unit economics

Now we are coming to the unit economics, which I think is the most important part. I had a significant concern regarding Etsy's business earlier because their general and administrative expenses used to represent more than 50% of total operating expenses. It usually means that the company isn't growing organically. And this trend changed during the Q1 2016. 

I usually calculate an each type of expenses by on paying customer (or buyer). I came to the following results:

  • marketing expenses per active buyer increased by 8%;
  • product development expenses per active buyer increased by 1.7%;
  • G&A expenses dropped by 22.4%.

The company is growing, marketing and product development expenses are going up as well. General and administrative expenses dropped significantly and it means that the company is going to increase its efficiency. Their operating profit per 1 active buyer increased from $0.76 to $1.39 representing more than 82% growth. This is a lot. 

Margins

As we can see, unit economics looks really attractive. Margin analysis is clueless in this case, because the company had operating loss and net loss in Q1 2015, but converted it into positive numbers this year. So now we can't say that the company reached the breakeven, we'll see the full picture of the overall business in March 2017 when the company reports its 2016 fiscal year results. 

Conclusion

I think that Etsy is a good stock to own, because when the company reaches the breakeven, the stock could gain a lot. I'd better buy a few calls and just wait - the company is on a right way of changing the business approach.