Written by Felix Richter, Statista.com
— this post authored by Felix Richter with added content from Econintersect
While 2020 will be a year to forget for most companies, some businesses have thrived under the special circumstances created by the COVID-19 pandemic. Etsy, an online platform for crafts and handmade products, is such an example. While most e-commerce businesses have done well this year, Etsy managed to leverage its large seller community to help cope with the crisis and grow its business.
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After the CDC had officially put out a recommendation for people to wear “cloth face coverings in public settings where other social distancing measures are difficult to maintain” on April 3, Etsy encouraged its community to help supply such masks to the public during this unprecedented crisis. “We hope that increasing the availability of fabric, non-medical grade face masks from Etsy sellers will allow more medical and surgical masks to reach the people who need them most: front-line healthcare workers,” the company said in a blog post on April 7, while also reporting that hundreds of thousands of face masks per day were already being sold on the platform. In April alone, more than 12 million masks were sold on Etsy’s marketplace, while more than 110,000 sellers sold at least one mask between April and June.
By the end of September, gross merchandise sales of masks sold on Etsy amounted to more $600 million, contributing more than 10 percent of total GMS in both the second and third quarter of 2020. As the following chart shows, Etsy’s blockbuster growth in platform sales this year cannot be traced back to masks alone, however. Not counting mask sales, Etsy’s gross merchandise sales would still have doubled between April and September when compared to the same period of 2019.
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Added content by Econintersect
Etsy, Inc. (NASDAQ: ETSY) made its stock market debut on April 16, 2015 with an initial public offering (IPO) of $16 per share. From a surge of $31 on the IPO date ETSY traded lower and by the end of 2016 closed just below $12 (hitting an all-time low of $6.04 January 18, 2016). With the closing price on Friday ($170) ETSY becomes the latest member of the “10-Bagger Club” based on IPO price. There were entry points during 2015 and 2016 that would have resulted in a “20-bagger”.
The chart below shows ETSY’s price from the beginning of 2017 to date (corresponding to the time frame for the earnings data covered by the Statista graphic above).
Is ETSY fairly valued at current prices? As of the close close on December 11, 2020 the PE (price-to-earnings ratio) is 91, which is within the historical range since the middle of 2017 (data and graphic below from MacroTrends).
A traditional metric for validation is that the PE ratio should reflect the forward earnings growth rate. This means a PE of 10 is correct if the coming 12 months earnings growth rate is 10%. For ETSY the projection is that earnings will nearly double (grow by 92%) in the coming 12 months.
Is that reasonable?
An answer would take more time than we will devote here. But, from historical reference, it may or may not be:
- The PE ratio at the end of Q1 2019 was 90, following a stock price rise of 140% over the preceding 12 months. The implied stock price rise for the next 12 months was, therefore, 90%. The stock price fell by 57% while earnings per share declined by 17%.
- Let’s look at another time period. The PE ratio at the end of Q1 2018 was 36, following a stock price rise of 164% over the preceding 12 months. The implied stock price rise for the next 12 months was, therefore, 36%. The stock price increased by 140% while earnings per share declined by 4%.
To determine what to make of the current PE ratio of 91 for ETSY requires some deeper analysis.
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