As we move into the digital age, we find ourselves engaging in more online activities, including good old shopping.
This trend means more and more people are getting acquainted with online shopping, leading to a boom in e-commerce.
The surge was accelerated by the pandemic last year, where people were forced to stay home and make purchases of essential and non-essential items online.
As such, many e-commerce companies have benefited from the shift in consumer behaviour.
Etsy Inc (NASDAQ:ETSY) is one of the e-commerce platforms that benefited greatly.
Etsy is an American-based e-commerce company that specialises in handmade and vintage items, as well as craft supplies.
On its website, the company prides itself as being the fifth most popular e-commerce and shopping platform in the US.
Below are some reasons why the business is worth keeping on your watchlist.
Strong competitive moat
Etsy’s has a long-term growth strategy called “Right to Win”.
This strategy has placed the company ahead of its e-commerce rivals.
Here’s how Etsy differentiates itself from its competitors.
Note: A “right to win” is the ability to consistently perform well in a competitive market.
1. How Etsy brands itself
Etsy upholds itself as customers’ trusted brand through its proactive customer support.
It also exerts a strong impact in the economic, social and environmental sectors.
In particular, the company sourced 100% of its electricity from renewable energy and runs a carbon neutral business as of 2020.
2. Products sold on Etsy’s platform
Etsy is a marketplace where sellers display their collection of unique items.
Due to the customisable nature of the items sold in over 50 product categories, Etsy is an e-commerce platform with its own niche.
For example, vintage items listed by sellers have to be at least 20 years old.
Its business model is especially attractive to artists and serves a unique group of customers who wish to buy handmade or vintage products.
In this way, Etsy differentiates itself from other e-commerce sites which tend to focus on generic products.
3. Etsy’s search and discover technology
Since Etsy’s acquisition of BlackBird Technologies (a machine learning company) in 2016, the company has been continuously improving its user experience by providing a more personalised shopping experience for buyers.
Its 2021 focus areas were to improve search performance and implement website infrastructure to increase conversion rates.
To achieve the above, the company is increasing site speeds and expanding its listing coverage.
4. A powerful network effect
Etsy’s platform enjoys powerful network effects.
By providing a platform for entrepreneurs to sell their carefully curated products, Etsy attracts a pool of buyers who seek these unique goods.
As demand builds up through word of mouth and referrals, more sellers are attracted to join the Etsy platform due to an explosion of buyers.
This virtuous cycle ends up strengthening the company’s platform even further as it becomes well-known for being a one-stop shop for unique, handcrafted items.
In the first quarter of 2021(1Q 2021) alone, the platform attracted 16 million new and reactivated buyers (i.e. never shopped on Etsy or haven’t shopped on Etsy in prior 12 months) , a 113% year-on-year increase.
Note: The network effect refers to a phenomenon where a company’s product and services become more valuable due to more people using it.
Catalysts for growth
The e-commerce site has also since invested in new projects.
These projects could scale up the company’s operations as well as increase the number of merchants coming onboard.
1. The acquisition of Depop
Depop is a fashion marketplace based in the UK that targets Gen Z shoppers.
In 2020, Depop’s gross merchandise sales totalled US$650 million, more than doubling year on year.
Etsy’s strategic move could potentially open up doors to a new consumer base and expand its total addressable market.
This savvy acquisition is expected to close in the third quarter of 2021.
2. The launch of offsite advertisements
Offsite advertisements are unique to Etsy and puts sellers first, which helps to keep the network strong.
Etsy pays an upfront cost to promote sellers listing on various high traffic sites such as the Google search engine, under Alphabet (NASDAQ: GOOGL), Facebook (NASDAQ: FB) and Pinterest (NASDAQ: PINS).
Sellers only need to pay Etsy the advertising fee if the buyer clicks on the ad and purchases an item from the seller, hence no upfront cost is needed from them.
In 2021, Etsy added new big-name publishing partners such as Buzzfeed and Real Simple.
Offsite advertisements are helpful in value-adding to existing sellers and attracting new merchants.
Stellar financial growth
At its peak in February this year, Etsy shareholders were rewarded greatly with a return of about 814% since its IPO in 2015.
It’s no surprise that the company’s revenue and net profit have surged in tandem with its stock.
Revenue of Etsy was US$1.7 billion in 2020, clocking up a 110.9% year-on-year growth.
While the pandemic had no doubt contributed greatly due to the rise of stay-home shoppers, the company was also displaying steady growth way before the virus struck.
From 2016 to 2019, Etsy’s revenue grew at an annual growth rate of 22.4%.
Therefore, it is evident that the business has progressed consistently year after year since going public.
Etsy’s gross merchandise sales (GMS) growth is closely related to its revenue growth, as shown in the graph below.
Source: Etsy’s Annual Reports; graph by author
Its strong performance carried over to 1Q2021, where the business generated GMS of US$3.1 billion, up 128% year on year.
Worldwide e-commerce sales are estimated to reach US$6.4 trillion in 2024, a 30.6% increase from 2021.
Hence, there is great potential for growth in the industry as well as in Etsy’s business.
With its strong competitive moats, new projects and strong financials, Etsy is a company worthy of a growth investor’s watchlist.
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Disclaimer: Jia Yi does not own shares in any of the companies mentioned.