The COVID-19 pandemic continues to disrupt people’s lives all around the world. As businesses remain shut, unemployment rates are moving higher at a fast clip. According to data from Trading Economics, unemployment rates in the U.S. might touch 15% by the end of June. However, some companies are thriving amid the coronavirus uncertainty.
As people are largely staying at home, the online shopping trend has accelerated in the last two months. This continues to benefit e-commerce companies such as Etsy (ETSY -1.04%), Shopify and Amazon. In the below chart, we can see how these online shopping companies have crushed broader market returns in 2020.
Etsy recently reported its first-quarter results and let’s take a detailed look at what drove the company’s sales higher.
Etsy beat consensus revenue estimates, misses on earnings
Etsy announced its Q1 results on May 6 and reported revenue of $228.06 million, higher than analyst estimates of $220.2 million. However, its earnings fell 58% year-over-year to $0.10 and were below estimates of $0.18.
While the world was coming to terms with the dreaded virus, Etsy’s platform experienced a growth of 32.2% in gross merchandise volume that stood at $1.35 billion. Comparatively, sales were up 34.7%.
Etsy has two primary business segments. Its Marketplace business operates like most other e-commerce platforms that connect buyers with sellers. Revenue consists of seller fees that are paid for marketplace activities such as the listing of items for sale, using Etsy’s payment platform, and completing transactions between the two parties.
Etsy charges a 5% transaction fee from sellers for each completed transaction and a $0.20 listing fee. Etsy’s payment processing fees consist of 3% to 4.5% of the total sale price.
Its Services business comprises of advertising services. Sellers pay Etsy for a prominent listing of items in search results. Services sales also include Etsy shipping labels that allow sellers in countries such as the U.S., Canada, Australia, and the United Kingdom to purchase these labels at a discounted price.
Image source: Getty Images.
In Q1, Etsy’s marketplace sales were up 22.6% at $155.9 million while Services sales rose a substantial 71.1% to $72.13 million. Etsy confirmed that demand was volatile in March and it managed to easily beat market estimates despite demand uncertainty.
Why Etsy is well poised for robust sales in 2020?
Etsy confirmed that it sold 12 million face masks on its platform in April was and bought in $133 million in GMV. In an interview with CNBC, Etsy CEO Josh Silverman also stated that the number of new shops on its platform doubled last month, and sellers are pivoting to the changing needs of the people. Silverman stated, “We also experienced broad-based demand across the marketplace leading to over 100% growth for the Etsy marketplace in April.” Total GMV in April rose 130% to $860 million.
Etsy primarily focuses on increasing its seller and buyer base to drive revenue. A higher number of sellers will increase GMV, seller fees, payment fees as well as ad revenue. In order to get more sellers on its platform, Etsy temporarily waived seller ad fees until May 1. It's also providing sellers with a one-month grace period for billings, which will help the latter improve short-term liquidity.
In Q1, the number of active sellers rose 26.4% to 2.8 million while the number of active buyers was up 16.4% at 47.74 million.
For the second quarter, Etsy forecast GMV between $2 billion and $2.2 billion, an increase of 80% to 100% year-over-year. Comparatively, sales are expected to rise around 80% to between $310 million and $340 million. This forecast was significantly higher than average analyst sales estimates of $213.48 million.
Why Etsy remains a solid long-term buy?
While the coronavirus pandemic has forced people to shop online right now, it will accelerate the secular trend towards e-commerce. According to an eMarketer report, online shopping will account for 16.2% of total sales in 2023, up from 10.7% in 2019 and just 8.9% in 2017.
Etsy is a niche platform that sells handmade goods and vintage musical instruments (post the acquisition of Reverb). The company has estimated the total addressable market at $249 billion in its core geographies that include the U.S., Canada, Germany, Australia, France and the U.K. This market is forecast to expand to $437 billion by 2023, giving enough opportunities for the company to drive sales in the upcoming decade.
Etsy can easily expand global reach and target new markets in high growth regions including Asia and Latin America. Etsy stock went public back in April 2015 at a price of $16 per share. The technology stock has since gained 379% and might continue to crush broader markets and generate significant wealth for long-term investors.
