Etsy’s second quarter revenue came in 30% higher than a year ago. The stock is up about 11% today. This clearly is the opposite of Zillow, not just because they’re in a different business. When you look at shares of Etsy, not just up today, but over the past year, up 200%, this really seems like we’re buying this thing for the growth, profits be damned.
Bill Barker: And the growth is there. That’s the good news. Profits are the kind of thing that investors have been trained over the years to be patient in waiting for from high-growth internet companies. I’ll give you some insight on what the growth looks like over the last quarter: 20% on the gross merchandise sales; 30% rise in Etsy’s cut, the revenue; 55% up on services revenue; 118% increase in adjusted EBITDA. The profitability is small but growing fast.
One of the data points that’s particularly helpful is, they’ve increased their transaction fee to 5%, up from 3.5%, which is easy to see, given the popularity of their site, is going to translate to significantly increased revenue.
Hill: No retailer is completely Amazon-proof, but if you’re going Etsy, you’re absolutely finding things that you’re just not going to find on Amazon.
Barker: Yeah. That’s its charm, I guess. I’ve never been there. I’m not as much into arts and crafts as I’m sure you are. But, I think they’ve established a good name for themselves in a business which is more difficult for Amazon to pursue and crush than other big businesses.
Hill: When you look at Etsy’s market cap, about $5.5 billion right now, do you think someone makes a bid for them? Not that they’re necessarily looking to sell their business, but, they’ve had this great run up, and still, in the grand scheme of things, it’s not an enormous company.
Barker: No, there would need to be some synergies there because you’re not going to get it cheap. For somebody to be interested in acquiring it, it would have to fit into their portfolio, rather than any sort of private equity type of transaction. The company doesn’t need to sell itself. It’s awfully strong. The market is reacting very positively today. It’s being priced generously based on a very interesting-looking future. I don’t see who the acquirer is, unless they see making the future even more interesting by virtue of their being associated with it.
Hill: I don’t know. Zillow is in a buying mood, maybe they’ll make a bid for them.
Barker: I’ve just argued that Zillow’s acquisitions at least seem to make sense. You are arguing that Zillow should stop making sense.
Hill: I and others are making the case that Zillow needs to take a breath. Zillow needs to calm down, stop buying things. To this point, they’re not getting the benefit of the doubt. I should say, they haven’t earned the benefit of the doubt at this point.
Barker: I think they’ve accomplished quite a lot —
Hill: I think they have, too. I’m just saying, in terms of non-core acquisitions, they need to put that aside for a moment.
Barker: I think the asset-lite point is important. The market tends to like asset-lite business more than asset-heavy businesses. Especially when things go wrong, you don’t want to have a lot of homes on your inventory and be carrying all that. It’s not always the case that going from asset-lite to, in part, heavier on your assets is a mistake, but it’s very rare that it’s well-received in the short-term. So, I would express more confidence in the path that Zillow is going down than the market seems to today.
That said, the guidance on the revenue going forward was a rather dramatic lowering. That had to do with the revenue recognition on this home-flipping and some of that stuff. It was presented as an accounting-type issue, but I don’t know.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bill Barker has no position in any of the stocks mentioned. Chris Hill owns shares of AMZN. The Motley Fool owns shares of and recommends AMZN, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends Etsy. The Motley Fool has a disclosure policy.