Etsy (ETSY 49.30, +3.27, +7.11%) is trading higher today on an upgrade from
Goldman to Buy. Briefing.com has been following the name for a while, and with
the new year getting underway, we wanted to provide some color on why we think
Etsy is a name to keep on the radar in 2019.
Etsy operates on online/mobile marketplace in which people buy and sell unique goods -- in particular, handmade goods. Its marketplace boasts a large assortment of handmade, vintage, custom, and crafted products from all over the world covering many product categories, from jewelry to party supplies to houseware to art and collectibles.
Much excitement surrounded Etsy's IPO debut in April 2015; the launch priced at $16 and traded up to $35 on its first day. But by early 2016, as the company faced struggles, shares were inhabiting the mid-single digits. However, a new CEO, Josh Silverman, was hired in May 2017, and the stock has been in turnaround mode ever since. Silverman brought an impressive background to the role, having formerly served as CEO of Skype and CEO of shopping.com. He had also held various executive roles at eBay and had, earlier in his career, co-founded Evite. He has focused the company on driving sales and on improving transparency with customers.
In June 2018, Etsy announced a major change in its pricing strategy for the first time in its history. Essentially, it bumped up the transaction fee that it charges sellers to 5% from 3.5%, starting in mid-July. This noteworthy change showed promise to deliver revenue growth, and Etsy’s choice to commit to what amounts to a robust 43% increase in transaction fees also shows Etsy's confidence in the quality and importance of its platform. The company also introduced new pricing tiers: Etsy Standard, Etsy Plus and Etsy Premium.
Etsy said that these changes will help to fund efforts to attract buyers, enhance customer support, and drive product innovation. Specifically, Etsy said that it would increase its direct marketing spend by at least 40% in 2018. It also decided to revamp its Etsy community platforms and execute what it feels is an exciting product roadmap.
Furthermore, Etsy sees a great deal of opportunity to improve its search capabilities when providing search results. For example, Etsy hopes to strengthen features to filter searches by a buyer’s location in order to better follow and respond to regional trends. Etsy is also focusing more on international growth, including in the U.K., France, Canada, and Australia. Also in-line with goals of furthering international operations, the company announced a referral agreement with DaWanda, a privately held Germany-based marketplace for gifts and handmade items.
In sum, we like the direction that the new CEO has been taking over the past 18 months or so. He has a solid pedigree and a good track record with other businesses. The higher transaction fee was a bold move and should act as a nice tailwind in 2H18 and into 2019.
Looking ahead, Etsy typically reports Q4 results in late February. The holiday quarter is always a key quarter for Etsy as its platform is a great place to buy unique gifts. Just as important, we expect Etsy will provide its outlook for 2019 at the time of that report. The higher transaction fees have been in place for a few months now, and 2019 will be the first full year at the higher pricing levels, so investors will be eager to get a better sense of how much impact these changes will be expected to have on Etsy's results going forward.
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