Should we invest in Etsy?

Published on 06/09/21 | Saurav Sen | 2,981 Words

The BuyGist:

  • This is a long-form thesis - an expanded version of our Etsy Thesis Presentation.
  • We go through Etsy's positives: Competitive Advantage & Moat, Strategy, and Growth Drivers.
  • We go through the Negatives: Competition and Key Risks.
  • We end with our valuation estimate of Etsy's stock and a plan of action.

Competitive Advantage & Moat

Summary: Differentiated, niche value – connects buyers to individual sellers/makers of handmade products. Short-term Moat is Scale; long-term Moat is Trust.

Etsy has carved out a niche for itself. It’s a marketplace specifically for handmade products by individual artisans – possibly quirky and decidedly not mass-produced. Etsy, in CEO Josh Silverman’s words, is never going to be “everything for everyone”. It’s about “making commerce human”. That sounds fluffy, nebulous, and sales-y. But it’s about a P2P (person to person) transaction and not a B2C (business to consumer) one. The emphasis is on authenticity and genuine craftsmanship. Etsy stands for something tangible, and it has already built a scalable business around it.

Etsy homed in on a niche.  And it scaled. Etsy has already spent some money on creating a viable marketplace for handmade, artisanal product around the world. And now they’re spending more to expand into other “artisanal” markets such as musical instruments (Reverb) and vintage clothing (recently acquired De-Pop). The competitive advantage – almost immediate association with handmade, artisanal products online – is locked in. And by now they’ve achieved enough scale that it’ll be hard for even an Amazon to immediately break into Etsy’s territory. It will take some time to cut into Etsy’s domain:

But this scale is Moat only for a short while. The long-term Moat is Trust – between sellers and Etsy, and between buyers and Etsy. The weird thing about P2P transactions is that both sides need some handholding. Unlike B2C transactions, on average, there is potential for more idiosyncrasy or weirdness in P2P transactions. Unless there is an honest “broker” that ensures a minimal level of quality and honor in the transactions, it’s very hard to keep expanding that Trust Moat. We made a similar point in our AirBnB thesis.

Scale begets Trust. And Trust begets Scale. It’s a virtuous cycle – IF Etsy can keep investing the specific things that built scale and trust.

Next, we'll cover the following: 

  1. Management Strategy
  2. Growth Drivers
  3. Competition
  4. Strategy Risk
  5. Key Risk
  6. Valuation
  7. Final Investment Thesis Summary
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