What to Expect From the Etsy IPO

As widely expected, Etsy, Inc. has filed for an IPO. The company, which operates an e-commerce marketplace to sell handmade crafts, plans to list on the Nasdaq under the ticker of ETSY.

What to Expect From the Etsy IPOThe lead underwriters on the deal include Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS).

Unlike many S-1’s, which tend to be dry and boring (hey, they are often drafted by many attorneys!), the one from Etsy is definitely written with lots of flourish. Here’s just a sample:

“Our mission is to reimagine commerce in ways that build a more fulfilling and lasting world. We are building a human, authentic and community-centric global and local marketplace. We are committed to using the power of business to create a better world through our platform, our members, our employees and the communities we serve.”

While this may seem a bit sappy and over-the-top, the fact is that Etsy has built a solid business. Consider that there is now a thriving community of 54 million members, which include 1.4 million active sellers and 19.8 million active buyers.

And the company has been able to monetize this platform, which should help boost the Etsy IPO.  In 2014, revenues hit $195.6 million, up 56.4% on a year-over-year basis. Etsy makes money from a combination of transaction and listing fees from sellers.

Yet the company has continued to post losses. For 2014, they came to $15.2 million. Although, the S-1 points out that the adjusted earnings before interest, taxes, depreciation, and amortization was $23.1 million.

It’s actually tough to get a sense of the market opportunity. According to Euromonitor, the global online retail market was $695 billion in 2013 and is expected to reach $1.5 trillion by 2018.

So how much of this will come from products that Etsy focuses on? Well, the S-1 does not provide any details.

But there are already signs that the market may be somewhat limiting.  For example, in late 2013 the company loosened its rules on manufacturing and outsourcing of products, which allowed for much larger companies to participate in the marketplace. There was also a move to connect sellers directly to traditional retailers.

As should be no surprise, this has frustrated the company’s loyal early adopters, who are mostly micro-businesses. It also shows the Etsy’s messaging seems a bit hollow.

Another issue is that recent IPOs of e-commerce companies have not fared so well. Take a look:

Company Return Since the IPO
Zulily Inc (NASDAQ:ZU) -63%
Wayfair Inc (NYSE:W) -23%
Alibaba Group Holding Ltd (NYSE:BABA) -10%
Groupon Inc (NASDAQ:GRPN) -70%
HomeAway, Inc. (NASDAQ:AWAY) -20%

Then there is cautionary tale of the implosion at Fab.com, a former high-flying e-commerce company that focused on artisanal furniture and achieved a valuation of over $1 billion a couple years ago. Unfortunately, the company sold for a mere $15 million this week.

Kind of scary, huh?  Definitely.  Although, investors will still probably show lots of enthusiasm for the Etsy IPO. The company is a dominant player in its space, has a powerful global brand, a large user base and strong revenues.  In other words, such factors should lead to a pop on the opening.  But as seen with many other e-commerce IPOs, it could be tough to maintain a hefty valuation for the long haul.

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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