Monday, April 13, 2015

A Closer Look: The Etsy IPO

Hello everyone!

Hope you've all been having a great Monday so far. Today I want to introduce a new series on the blog entitled "A Closer Look". My goal will be to examine various companies from upcoming IPOs to stocks on my watch list. 

What better way to Kickoff this series than with the infamous Etsy, which is expected to make its debut as a publicly traded company this coming Thursday under ticker symbol, ETSY.

In the case for IPOs I will take it upon myself to review the S-1 filling, so you don't have to, and I'll fill you in on what I find. 

Note: S-1 filling or "prospectus" is a document all companies looking to become public must file with the SEC (Security Exchange Commission). In a nutshell,  It has all the information a prospective investor would want to know about the company before it becomes public. 

Without further 'ado, here is what I found:

I. The Business:
  • Founded in Brooklyn, NY in June 2005  by Rob Calin and Chris McGuire as a marketplace for handmade goods, crafts, and supplies.
  • Company is a certified B-Corporation- it has rigorous social and environmental standards for the products sold within the marketplace.
  • What differentiates Etsy from other popular online retailers is that it has been able to cultivate a niche of unique and creative entrepreneurs that sell their hand made crafts to customers around the world looking for those same unique products they cannot find else where. The company has created a strong and growing ecosystem that has made a lot of money for a lot of people. And that brings us to our next topic.

II. How the company makes money (& Strategic Plans going forward):

As per the S-1 filling, Etsy breaks down their sources of revenue in three ways:

1. Marketplace Revenue
  • Sellers pay Etsy a fee for each transaction that is made (Ie: when someone buys their product).
  • Sellers also pay a listing fee for each item they sell

2. Seller Service Revenue:

  • Sellers have the option to pay for certain seller-assistance services that Etsy offers within its platform: Services can include anything from basic classes to prominent placement in search results (promoted listings) to payment processing services via direct checkout and purchases of shipping labels.
  • As per the S-1: during the year ended 12/31/2014; 46.1% of Etsy sellers used at least one of their seller services.
  • Seller services came in at $42.8M (34.2%) of revenue in 2013, which represented a 169.9% increase over 2012 and $82.5% (42.2%) of revenue in 2014, a 92.7% increase over 2013.

3. "Other" which include:
  • Fees collected from third party payment processors
  • Wholesale offerings (launched in August 2014): in this space, over 6500 local boutiques and three national retail chains (whole foods, Nordstrom, West Elm) make partnership deals with the sellers in order to diversify product offering and offer unique products within stores. Etsy charges wholesalers a fee for said collaboration.

Strategic plans to sustain and grow revenue and profit streams:

1. Make Etsy an everyday experience
2. Build local marketplaces, globally
3. Offer high impact seller services
4. Expand the "Etsy Economy" by continuing to connect sellers and skilled partners, continue focus on wholesale offerings and strategic partnerships
5. Invest in marketing (pilot testing in United Kingdom already showed favorable results in this area)

III. Financials

Company is still unprofitable. 
  • As of December 31st, 2014; Etsy had a total of 54 million members including 1.4 million active sellers and 19.8 million active buyers.
  • More than 11% of current active sellers have been using the platform for over 4 years
  • Gross Merchandise Sales (GMS) for 2014 came in at $1.93 billion, This represented an increase of 43.3% in comparison to 2013. Out of said sales 36.1% came from purchases made via online devices and 30.9% came from Etsy sellers & buyers abroad.
  • As a company, Etsy made $195.6 million in 2014, an increase of 56.4% in comparison to 2013.
  • Net Losses were  $15.2 million, $0.8 million and $2.4 million for 2014, 2013, and 2012 respectively.
  • Adjusted EBITDA came in at $23.1 million for 2014 V. $16.9 million in 2013.
  • Company reported a deficit of $32.4 million as of 12/31/2014.
Prospectus also emphasizes that operating expenses are expected to increase as the company hires new people, improves technology and makes further investments in the maintenance and growth of the company. Furthermore, as a newly publicly traded company is expected to incur additional legal, accounting cosrs and further expenses.

IV. Risks & Competition

There are so many risks listed in the S-1 that it would take me 24 hours to list them all. Whoever wrote that really wanted to cover all bases.  However, the top risks are listed are as follows:
  • The company has a history of operating loses, they claim it is "unknown" whether they'll be profitable and leave this up to the investors discretion. Note that this appears to be a standard listed risk for a lot of IPOs.
  • Possible fluctuations in quarterly operating results as a result of factors that may be out of the company's control
  • Staying true to the company's values and focus on long term sustainability may negatively influence short or medium term financial performance.
  • Competition: The company openly accepts the fact that they operate in a fiercely competitive environment. Etsy sellers have no binding contracts and are free to use other venues to sell their merchandise-- marketplaces such as Amazon, Baidu, Ebay.
  • Etsy also competes with companies that sell software and services to small businesses (sellers do not necessarily have to use Etsy seller services)

V. My Two Cents

Firs of all, if you have been reading my blog for some time now, you know I never invest in IPOs. I like to take my time and see how a company operates once it becomes publicly traded. Once I feel a company has 'proven itself' -- which can take anywhere from a couple of quarters to a couple of years, then I may consider buying. I have zero remorse about "missing the boat" on any IPOs and I love being able to sleep at night.

With that said, and after reviewing the S-1, I really feel this company may have the grounds to become even more wildly successful. Despite the competition from "big names", I feel that if the company was going to fail because of said competition, it would have failed already as it has been in operation for nearly a decade with the same exact competitors around it.

I feel the key word for this company is uniqueness, they have done a phenomenal job creating a true ecosystem of buyers and sellers of unique products and have been able to capitalize on that in a significant way. The company found a way to specialize and has created a niche and strong  'bond' within its growing number of buyers and sellers which may be difficult to disintegrate.

It looks like the company has very specific plans (see strategic plans above) in terms of what they plan to do with the IPO funds and I like where they are going with this. With that said, I'll be adding Etsy to my watchlist. Join me in seeing what happens in the next quarters and years going forward.

Tell me, is this a company you would consider investing in? why or why not? Do you know anyone that sells on their platform?

Thanks for reading and cheers to profits!