Etsy Crafting an IPO for Q1

Etsy is a solid company in a highly competitive market

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor

https://investorplace.com/?p=595552

According to a Bloomberg report, Etsy is gearing up for an IPO, which could hit the markets sometime during the current quarter. The company, which operates a site that allows people to sell their crafts, has retained Goldman Sachs (GS) and Morgan Stanley (MS) to lead the deal. However, an S-1 has yet to be filed.

Etsy-logo
Source: Wikipedia

So, will an Etsy IPO be good for investors?

Well, let’s first get a little background on the company: Back in the summer of 2005, Rob Kalin looked across the web for a good online marketplace to sell his handmade wooden computers. The search was fruitless as nothing impressed him. So he started his own site and teamed up with some of his friends. After working tirelessly for a couple months from Rob’s Brooklyn apartment, they launched Etsy.

Growth was strong from the start. According to VC Fred Wilson, who invested money in the first round of funding: “In the past 10 months, Etsy has grown by word of mouth to over 10,000 artists selling their handmade goods to over 40,000 buyers. Today, there are over 100,000 listings on Etsy, every single one of them handmade and available for sale.”

Since then, the good times have mostly continued. As of now, Etsy has 43.9 million members, 1.2 million active shops and 26 million listed items.

There is also a viable business model, which should provide a nice boost for an Etsy IPO. Much like eBay Inc (EBAY), Etsy makes money from a combination of listing fees, commissions, payment processing and advertising. In fact, it appears the company has been profitable since 2009 (based on a CEO interview from last year).

Despite all this, there are still some red flags for the Etsy IPO. First of all, the company faces lots of competition. Besides having to deal with mega players like Amazon.com (AMZN) and eBay, there are also a smattering of startups like Bonanza. Pinterest may also become a threat, especially as the company makes moves into ecommerce.

But the global market is also intense. Just some of the players include DaWanda (Germany), Zibbet (Australia) and iCraft (Canada).

And let’s not forget that ecommerce IPOs have had a mixed performance. While mega operators like Alibaba Group Holding (BABA) have pulled off successful deals, niche players have been another story. Consider that both Wayfair Inc (W) and Zulily Inc (ZU) are off by more than 40% since their deals hit the markets. By targeting smaller markets, it can be tougher to keep up the growth. And let’s face it, the handmade crafts market for Etsy isn’t really mainstream.

The Etsy IPO could very well get a strong reception. The company is the category leader and likely has strong financials, which probably got a lift from the Christmas season. However, given the travails of other niche ecommerce operators, it could be tough for the company to keep up the gains after the Etsy IPO.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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