Etsy is more than a four-bagger since it came public in 2015 but this stock
has been under tremendous selling pressure recently.
Does ETSY deserve a spot in your portfolio? Here's everything you need to know about the
business in about five minutes my name is Brian Feroldi and my name is Brian Stoffel
thanks to stockcard.io for sponsoring today's video brian etsy is a $19 billion company trading
under the ticker symbol ETSY etsy's mission statement is to keep commerce human both of
us love this mission statement and the business is relatively simple to understand etsy has a global
marketplace for unique and creative and often handmade goods that connects millions of buyers
and sellers from countries all over the world etsy makes money from its buyers and sellers
in two primary ways the first is marketplace revenue which is fees that are earned from
listing fees transaction fees and payments made on the platform the second way that earns revenue
is from services fees these are optional value-add services that include things like shipping labels
advertising and more the company is spending a good deal of money on sales and marketing right
now so we'd say it's acquisition costs are middle of the road but we expect it to improve while the
pandemic caused demand for etsy's business to absolutely skyrocket our long-term hunch is that
this business's ultimate demand profile will be semi-cyclical and because the company gets paid
every time there's a transaction we say that a majority of this revenue is recurring primary
remote protecting etsy's business is the network effect buyers naturally want to be on the platform
with the most sellers and vice versa with more than 7 million active sellers and more than
95 million active buyers etsy is the top dog and first mover in the handmade good industry
next we've got to call out the company's brand if you want a handmade good to create a present
for someone special to you etsy is the first place that a lot of people are going to think about i'd
also argue that the company benefits from counter positioning inherent in the mission statement to
keep commerce human is the fact that in a lot of ways ecommerce isn't human you don't get that
human touch with amazon or walmart.com etsy is the place to go if you want a handmade good by
an individual that you can communicate with since the number of active buyers and active sellers on
this company's platform have been exploding in recent years we think that etsy's moat is only
becoming wider now brian as you can see sales have absolutely exploded at a 77% clip since the
end of 2019 it should be noted that there are some acquisitions helping it out but more than anything
the sale of masks during the onset of the pandemic was a huge driver of growth one thing that i
love about etsy's business is that a marketplace business like this tends to have very strong gross
margins and with the recent gross margin of 73.3 percent etsy definitely benefits from that ryan
as you can see while revenue has grown at a 77% clip net income is growing even faster which is
a very positive sign and as we love to see etsy is successfully translating that net income into free
cash flow now one thing we do need to note is that the company has a lot more debt on its balance
sheet than it does cash part of that is because of the acquisitions that they're making part of it's
because investments in their core business but it's something to keep an eye on and for right
now the company's returns on capital are medium high this number could go higher over time as
it pulls back the spending on sales and marketing there was a team of individuals who founded etsy
a number of years ago and rob calen was the key one because he stayed on as the company's
ceo for a number of years however he is no longer with the company instead the current ceo is josh
silverman who was hired as an outsider more than five years ago recently silverman's ratings have
improved markedly and the company now gets stellar reviews on glassdoor and much to our delight
insiders own about 3.8 of shares outstanding which is worth more than $700 million at current prices
that's not a tremendous amount in absolute terms pretty high considering that submarine
was only hired five years ago when we consider the company's optionality we need to think about the
company's acquisition like d-pop which is into apparel reverb which is like an etsy but for
used instruments or elo 7 which is basically the etsy of brazil it is worth knowing that
etsy has benefited hugely over the last couple years from operating leverage but that means
that it doesn't have a tremendous amount of operating leverage left in the business
now management has called out an opportunity that might seem unbelievable $1.7 trillion dollars even
if they don't reach anywhere near that number it's clear that there's a huge runway for growth and
while etsy has made a number of acquisitions in the last couple of years we are still heartened
to see that the majority of this company's revenue growth is from organic channels now if we look at
how etsy stock has performed it has crushed the market it is a four bagger since going public
but it fell after going public and over the last five years it has returned over a thousand percent
one thing i like about etsy is the management team has a beat and raise kind of culture and
has exceeded expectations in four of the last four quarterly reports and not surprisingly
given the growth opportunity ahead the company is not returning cash to shareholders in any form so
what are the key risks for investors to watch first and foremost keep an eye on competition
from both big companies like amazon and walmart as well as smaller companies such as big cartel
and aside from that competition it's a fairly low risk business even the valuation because
the stock has fallen so much is not that bad with the stock trading at about 33 times
trailing free cash flow so what do investors need to watch moving forward first and foremost keep an
eye on a metric called gross merchandising sales this is the total value of all transactions that
take place on etsy's platform next keep an eye on active buyers and sellers as we said right now
active sellers sits around 7 million and active buyers is rapidly approaching 100 million we
want to see those continue to grow because it's evidence of the network effect finally
keep an eye out for signs that the company's acquisitions are working out dbop reverb and elo
7 were all major uses of the company's capital we want to see the company translate that into
growth and top line sales so how did etsy score on our investing checklist the answer there is
really good for me this company got an 81 which is well into my high quality business category for
me it got a score of an eight which you would think might be higher but you have to keep in
mind that the founders are no longer involved the insider ownership is not as high as i like to see
and the company has a lot more debt than cash that said it is still in my investable range
all right brian so i'm going to head on over to stockcard.io i have the antifragile portfolio
pulled up which is your thumbs up portfolio i'm going to place a new order for etsy we're going to
do a buy decision today's date is monday january 31st and we're going to be buying seven shares of
the stock and for you the score was an eight next we're going to head on over to my portfolio which
is the brian for all the quality checklist and i'm gonna do the exact same thing while brian's doing
that we want to remind folks that you can still enter the beat the brian's contest on stockcard.io
your goal is to pick five stocks that you think will perform the best between the day that you
start your portfolio and the end of the year all right brian we made our call both of us think
that etsy is gonna beat the market from here only time we're telling for right brian's out