Etsy: Buy, Sell, or Hold?

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Etsy stock keeps falling lower and lower. As the share price drops, more people are wondering whether this is the time to finally buy this social online marketplace.

Etsy has an interesting business model. It serves as an online market place where buyers and sellers of vintage, handmade, craft and other such specialty or novelty products can find each other.

It operates as a very anti-corporate sort of company. Its brand is based around being against mass manufacturing and against big scale and advertising that tends to dominate in most publicly-listed companies.

It tries to help small entrepreneurs and takes social responsibility seriously. It is one of the few companies structured as a B corp instead of a C corp, aiming to put employees instead of shareholders first.

All that is well and good, but how’s the business? As of last quarter, Etsy now has more than 35 million individual product offerings hosted on its site. And there are now more than 1.5 million different active sellers that use the site to try and vend merchandise.

But beyond the interesting business model, there lurks many problems. For one, there is little evidence the company’s business model will ever become profitable. Etsy is up to a run rate of $300 million in revenues now, a significant number, and its platform is over 1.5 million vendors. That should be enough to make the business financially feasible. Despite that, the company is still running a -22% profit margin. Shareholders have noticed the problem. Shares IPOed at 16, traded up to 30, but are now down to 9 and hitting new lows.

Over the past 12 months, Etsy lost $55 million on $250 million in sales. Cash flow was under $20 million; even before capital investments, this company is hardly generating any cash.

And troubling signs are starting to mount. The company has been hit with problems from the US dollar. Granted, so have many companies. But it’s still a key problem hurting sales to non-Americans, and with the US dollar index pushing new multi-year highs now, the situation continues to deteriorate.

Additionally, Etsy’s core business is slowing. The company only added 49,000 new net sellers over the last quarter, its lowest add in more than two years. The company traditionally adds 60 to 70 thousand new sellers per quarter.

Competition is on the rise. Amazon is making a headlong move into the space with its new Handmade offering. So far, it’s been slow going for Amazon, with just 5,000 artisans on board so far. But Amazon is a formidable competitor that generally has the patience and skill set to get its offerings right sooner or later.

Furthermore, Etsy has made some changes that may end up cannibalizing its own brand and ethos. First up, Etsy made a controversial move to allow artisans on the site to hook up with manufacturers should demand exceed what the local entrepreneur can self-manufacture.

This sounds great, in theory. More sales, and Etsy gets a cut from the manufacturer for facilitating the business. A win-win, right?

In practice, it is diluting the company’s brand. Many of the site’s vendors are upset. They say that while there may be wiggle room regarding the usage of terms like handmade, this goes beyond the line.

One of the main draws of Etsy is that it feels authentic and genuine for customers. They get to buy goods directly from mom and pop artisans working on something they love.

If and when that honest-feeling type of experience is replaced by dealing with third-party vendors in far-flung locales, the company will lose the appeal that has made it so popular among millennial and socially conscious shoppers.

Already, there are numerous complaints that the site is being flooded by cheap low-quality goods being manufactured by Chinese and other Asian sources. These products are, it is alleged, overtaking and underpricing the sorts of truly handmade goods that individuals had been making in the states.

The company is also facing concerns over moving much of its property to Ireland. This move appears to have been made solely for the purpose of sheltering the company from much higher tax rates it faces in the United States. Again, it’s not necessarily wrong, but like the contract manufacturing issue, it threatens to paint the brand in a bad light.

With the company never turning profitable, various controversies threatening the company’s superior image, and competition on the way from big dog Amazon, it’s easy to call avoid on this stock.

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