Etsy primarily offers a two-sided marketplace platform called Etsy.com. Merchants list and sell their products directly to customers via this platform, which is the main cash cow of the company.
Additionally, compelling data-driven technology infrastructure of Etsy helps it accurately analyze large volumes of customer data, and generate insights to strengthen the performance of its marketplace platform. (See Etsy stock chart on TipRanks)
Last week, Needham analyst Anna Andreeva interviewed former COO of Depop, Dominic Rose. Notably, resale fashion marketplace provider Depop was acquired by Etsy for $1.6 billion in July to broaden and strengthen its presence in the Ecommerce space. Andreeva came to a few conclusions after the conversation, which we will discuss in detail.
Sticky customers: Products on Depop target customers within 16-20 years of age (Gen Z). Since the platform is highly active on social media, customer retention and engagement is quite high. Moreover, more than 70% of sellers are also customers, and about 40% of active buyers are also vendors. These favorable data points are creating a brand value for Depop. Andreeva expects customer-friendly resale players like Depop to thrive in the resale retail space and take market share away from legacy brands. “Resale spending is coming more out of the traditional retail fashion channels, especially the fast fashion space, as opposed to the tradeoff between other resale platforms,” she said. This is good news for Depop’s current owner Etsy.
Clever commissioning: Depop has a take-rate of 10%, which is a commission charged by a marketplace platform on a transaction made by a third-party seller. This take-rate is less than Etsy’s, which is around 17%. Given the high price sensitivity of Gen Z, it was prudent of Depop not to increase the commission to drive monetization. However, the analyst notes that integration with Etsy’s expertise and scale gives Depop a position of advantage, which may soon prompt an increase in take-rate to around 15%. This shouldn’t impact sales or new listings much because it will still be in line with the take-rates of other major platforms. Moreover, most sellers on Etsy and Depop are professionals, who look at take-rates as the cost of doing business, and are not likely to jump ships for a 5% increase in commission.
Andreeva says, “We view ETSY as a unique business model that in the last few years has gone from a niche Ecommerce marketplace to a top-of-mind shopping destination across numerous categories, demographics and geographies.”
Meanwhile, the analyst believes that Etsy is still in the early stages of a number of products and marketing initiatives, and increasing customer engagement on these initiatives will help better retention of the impressive number of buyers and sellers acquired in the last 18 months.
Notably, Etsy is scheduled to release its second-quarter 2021 earnings report on August 4. However, investor sentiment ahead of the earnings release is bearish because of Amazon’s (AMZN) recent indication of a demand slowdown in Ecommerce in May. This led the Ecommerce group under Needham’s coverage to drop 11% of Ecommerce shares from its portfolio last week.
Moreover, in its last quarter earnings call, Etsy had mentioned that it expected a tough year-over-year comparison ahead in sales.
The analyst believes that a diverse portfolio, including categories like home, crafts, jewelry and apparel, is expected to protect the platform from the downsides.
On August 2, Andreeva assigned a Buy rating to Etsy with a price target of $250, suggesting 32.4% upside potential.
Consensus among Tipranks’ analysts for Etsy is a Strong Buy based on 11 Buys, 1 Hold and 1 Sell. The average Etsy price target of $221.33 implies 17.2% upside potential.
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
