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Daily Alert - 4/15/19

This e-commerce company beat estimates by $0.12 last quarter.

This e-commerce company beat estimates by $0.12 last quarter. The company is expected to grow by 50.7% this year.

Etsy, Inc. (ETSY)
From Canaccord Genuity Research

With an e-commerce landscape dominated by Amazon, it takes a special value proposition for other companies to prosper. Some qualities we have seen to be helpful are a unique supplier base, a differentiated value proposition for shoppers, and a customer experience that values other elements of a transaction above fast free shipping.

We see Etsy, Inc. (ETSY) benefiting from all of these elements, with added tailwinds of a large, under-penetrated market and specific operating improvements that should continue to make the business more efficient. New management has done an admirable job bringing the platform closer to best-in-class peers, although we still see room for improving operating performance leading to robust growth and stronger profitability.

Despite a measured focus on “Special” product categories within Etsy’s six core geographic markets (US, UK, Germany, France, Canada, Australia), we still see a $100 billion addressable market today growing to $170 billion in five years, with Etsy’s share expanding to ~5% based on our current forecast. We estimate an outer bound of $435 billion in addressable market if Etsy were to expand globally more comprehensively. We also see potential for much higher Etsy penetration over time, as surveys show that 26% of American consumers have purchased a personalized product and a majority of consumers are willing to pay a 30%+ premium for custom-made products.

During ’15-'16, Etsy fell behind e-commerce industry standards in areas like search, product discovery, and shipping. Over the last couple years, new management has made noticeable improvements to both the seller and buyer experiences. Etsy has recently tightened its focus to the four key initiatives of effective marketing, product search and discovery, consumer trust, and seller tools. The net result should be better marketing efficiency, higher customer lifetime values, and additional revenue streams. In particular, we see a good chance of upside to our forecast for order frequency and take rate, which should help keep estimates moving higher.

Etsy’s GMS growth has been accelerating for the past six quarters, from ~12% in 2Q17 to over 22% in 4Q18. While we don’t expect continued acceleration, we do forecast a lengthy period of consistently robust growth. Platform improvements around product discovery, shipping, and customer service should support deeper buyer engagement and, along with healthy buyer growth and slightly higher seller fees and attach rates on new services, should drive revenue growth of ~23%, well ahead of GMS growth of ~18%. In addition, despite elevated marketing investment in the near term, we forecast even faster EBITDA growth of ~30% and 700 bps of margin expansion from now until 2023.

Our $85 price target is based on 42x forward EBITDA and is supported by our DCF valuation. We think there are multiple drivers to keep operating performance improving amidst a scarce set of choices for e-commerce investors, supporting the premium valuation.

Maria Ripps, CFA, Michael Graham, CFA, & Alexander Frankiewicz, Canaccord Genuity Research,, April 4, 2019