What a run it has been for Etsy Inc (NASDAQ:ETSY). The online craft marketplace has been on a tear of late. Etsy stock now has tripled over the past year, with a 208% gain the 19th best among the nearly 1,900 stocks with a market capitalization over $2 billion.
Last week ETSY rose 27% after announcing that it was raising fees on its platforms, while also rolling out new services for its sellers. Those gains followed a Q1 earnings beat last month, and big gains after the Q4 report in late February.
Everything seems to be going right for Etsy at the moment. And it’s delivering on the promise that made Tracey Ryniec call it one of the 10 best stocks for 2018. The question now, with Etsy stock at all-time highs and with valuation looking potentially stretched, is if there’s more upside on the way.
Etsy Raises Fees
The big news on Thursday was that Etsy is raising transaction fees from 3.5% to 5%. The move might not sound like much, but it has a big impact on Etsy’s financials.
Guidance for full-year revenue growth was raised 10 points, to 32-34% from 22-24%. That suggests the move, alone, adds nearly 20% to Etsy’s revenue on an annual basis. EBITDA margins are expected to remain intact, as Etsy plans to reinvest some of the extra revenue in marketing and improved seller support. But, there, too, the move suggests profits will rise by almost one-fifth.
In that context, a 27% gain makes some sense. A company with 20% higher earnings should be worth at least 20% more. And with the increased spend potentially increasing growth expectations going forward, the long-term effect could be even larger.
How Will Sellers React?
So the 27% gain on Thursday makes at least some intuitive sense. And it also raises two key questions. The first is how Etsy sellers will react. Raising revenue per dollar of GMS (gross merchandise sales) only works if that GMS holds up. If sellers abandon the Etsy platform in response to the fees, then much, if not most, of the fundamental benefits of the fee hike will be lost.
Investors don’t seem to see that as much of a risk at the moment. That, too, makes some intuitive sense. For one, there really aren’t any other platforms for Etsy sellers to go to. Amazon.com, Inc. (NASDAQ:AMZN) has an Amazon Handmade business that offers 2-hour delivery, but so far Amazon hasn’t been much of a threat to Etsy’s growth.
eBay Inc (NASDAQ:EBAY) has higher fees, and a far less targeted customer base. Privately held and smaller sites like Aftcra and ArtFire don’t appear likely to take share. If Etsy can continue its steady growth in GMS and take more money doing so, this looks like simply good news.
Is Etsy Stock Too Expensive?
The second question, then, is whether Etsy stock already has priced in the gains. Raised guidance suggests 2018 Adjusted EBITDA around $130 million. In 2019, there should be another ~$10 million in profit contribution from the fee hike alone. Mid-double-digit organic growth suggests 2019 EBITDA of at least $160 million on revenue over $700 million.
Against an enterprise value right at $5 billion, both figures suggest pretty steep valuations for Etsy. The stock trades in the range of 30x forward EV/EBITDA, 7x EV/revenue, and likely 60x earnings. But considering the platform nature of the stock, and its growth, those multiples aren’t necessarily prohibitive.
Of course, both companies also have stronger growth and larger potential markets. SHOP and SQ should trade at higher multiples than ETSY at the moment. Without a direct comparable for ETSY, generating a tight valuation range is difficult.
Indeed, from here, ETSY seems to be mostly a “feel” case. Does an investor see the platform as having years of growth ahead of it? Or do the ‘homemade and handmade’ products offered on the site only serve a limited market that is likely to plateau?
It’s an interesting coincidence that on the same day ETSY stock was soaring, Michaels Companies Inc (NASDAQ:MIK) stock was plunging. Michaels is an old-line, brick-and-mortar retailer of craft products with a limited online presence. Its growth has stalled out and so has MIK stock.
Does that mean that demand is moving online and toward Etsy? Or does it mean that the craft industry as a whole is going to face demographic challenges, and limited growth? An investor’s answer to that question likely determine how he or she feels about Etsy stock.
As of this writing, Vince Martin has no positions in any securities mentioned.