Time to Take a Look at Etsy

by Andrew Zatlin

For a full transcript of this video, read below.

Hey, everyone. I'm Andrew Zatlin.

Welcome to Moneyball Economics, where we look at the crossroads between economics and trading!

And today, that's exactly what we're going to do:

We’re going to dive into the latest retail data, because I see some really cool stuff here. In fact, I see a trade I think we need to jump on. And without further ado, let's dive in.

So, retail: This is a monthly data point that the government provides. It's a snapshot of consumer spending, and it can be used in a bunch of different ways:

For one, at a high level, we’re in a consumer economy. So it tells us if consumers are spending more or less — the velocity, the pace of that spending, is what drives our economy forward or pulls it back.

That's big picture. That's macro-economics. If we dive into the details though, and look at where consumers are or aren’t spending, that gives us trade ideas.

So with that in mind, let's take a look at what happened last month, because I see a couple of themes coming out that we want to pay attention to and leverage.

So, in these charts here, I've taken retail spending — the growth in October — and I've divided it into two categories: where the spending was, and where the spending wasn’t.

The key concern right now in this environment is inflation. And that means we need to ask, “Is inflation in some things crowding-out spending somewhere else?”

That's the key question. And the answer is — yeah, obviously it is.

If we take a look at the left side, what we see is a lot of extra spending going into areas that are inflationary. For example, gasoline spending was up because gas prices were up. Food and Beverage is up because food prices are up. Auto prices are up slightly because we sold a few more cars, but mostly because car prices are up, and so on.

I'm going to talk about building materials and Non-store Retailers in a second. But what you can see is billions and billions, almost $5 billion, was spent on inflationary stuff for autos, gas, and food, which meant that money couldn't be spent on frivolous discretionary stuff.

And that's what we see on the right side. People didn't go out and buy new couches or clothes. They didn't go out more, or go shopping or drinking. And that's a concern.

In fact, in these discretionary areas, spending pretty much halted — it came to a flat-out stop. That’s something to keep in mind. Because inflation concerns are chipping away at the margins and preventing spending in a much more positive way, right?

You want people to buy things. You don't want them simply to buy the same thing and just pay more. That means real wages are coming down — and that's bad for the stock market.

Let's go back to the left side, though. Let's talk about where there was, I would call, “positive growth.”

Well, first we've got building materials. The numbers went up here. And the reason building materials went up is simple: the weather is good. There’s no reason to shut down construction. So that's a positive. Nothing additive, it's probably just pulling in from future spending.

What I want to dive into though, is the second and bottom items…

And the biggest key winner here is Non-store Retailer.

Obviously that's kind of a catchall “other” category. In the past, when they created this data point, this collection of spending, Non-store Retailer, wasn’t really a thing. Now it is a thing. And I'm going to show you why — and we want to pay real attention to this…

$3.5 billion in one month of extra spending — that’s huge! Well, where did it go? What is a Non-store Retailer? Do you think $3.5 billion went to vending machine operators or to the folks who were restocking the coffee supplies in the corporate offices or selling fuel directly?

No, $3.5 billion in one month went to electronic shopping. And you know what electronic shopping is. It’s eBay. It’s Amazon. It’s the websites out there that don't actually touch the inventory, but are the e-commerce marketplaces.

People are looking to buy holiday gifts a little bit earlier this year. They're not going to department stores. They're going online. So right off the bat, that's the first thing you want to have in the back of your mind. The retail data is showing us that consumers are willing to spend, that they’re maybe a little bit nervous about inflation, and are spending a little bit early to lock stuff in.

Or maybe it's just their concern that stuff isn't on the shelves. Or maybe this is yet another step forward in the way e-commerce dominates our economy.

That, my friends, is where I think we are — further and further down the path to where e-commerce is going to dominate this holiday season.

And that made me think: who else is an electronic seller who's going to benefit from this continued drive of e-commerce, and the continued drive to buy stuff online and get it sooner?

And I landed on Etsy. You might know Etsy. They started off a few years ago. It was kind of like a “do it yourself,” small crafts kind of folks wanting to sell their stuff in a marketplace. So not big, corporate type of selling, but more “mom and pop” store stuff. And they've evolved a lot. In fact, there's kind of an overlap between Etsy, Amazon, and eBay. But in general, they’re a rocket ship.

Let me show you the quarterly earnings of Etsy, relative to Amazon. On the left-hand scale, that's Amazon. And on the right-hand scale, that's Etsy.

But see the little bump up for Etsy? That's holiday shopping, fourth quarter, each quarter for the past few years. But notice the rocketing up starting in 2020? Etsy went from $200 million roughly per quarter and in just two years, 2020 and 2021, they've almost quadrupled their sales.

Now they're expected this quarter to get up to $700 million. That's not that impressive compared to the same time last year: $600 million. Well, you know what? I think they're low-balling. I think they're going to beat this number.

But the key point I want to show you is that the growth relative to Amazon — really the leader in online shopping — is very similar. And going forward, I think it's actually going to beat it.

Let's take a look at some other data points that I think are much more critical.

Again, let's go back to the major premise here. The winners right now in the retail space for spending are these e-commerce websites. But take a look at this…

If I take a look at the amount of dollars brought in per employee, this is what blows my mind. Now, we're talking about full-time employees, and that's key because Amazon has a lot of part-time employees, meaning their number goes down even further.

Look at Etsy. Etsy gets almost 50% more “bang” per employee — and they're young and they're still growing. So they're pulling in a lot more money relative to their employee base. And that means huge, huge, huge improvements going forward if their revenues grow, because that means their margins are even better.

So now take a look at what else is going on with this quarter's growth estimate — starting with Wayfair.

You know Wayfair, a furniture company. Online furniture selling is expected to drop, probably because we can't get the stuff on shore. I've been seeing things like a four to seven month wait to buy a couch if you want it. So Wayfair's probably struggling there.

Ebay. Ebay's just eBay. They're just struggling in general. The two winners here are Amazon and Etsy. They're both expected in the fourth quarter to grow about 10%, barely double digits. But like I said, I think Etsy's preparing to grow even more.

Why do I say that? Well, let me show you this last slide and come back to the other one.

This is my hiring data for Etsy. Now, in 2019 they were ramping up. They went public, had been trading for a couple of years, they're doing great. They're slow and steady. They suddenly ramped up in the last month — unbelievably so.

Clearly, Etsy is being overwhelmed by the amount of business that's coming their way and they need to ramp up their internal hiring. This to me is huge.

And by the way, I've looked at the latest mid-November data. It's the same high levels! Etsy is looking to ramp up their hiring so much because I think they're going to be blowing away the holiday numbers.

That being said, there’s one reason I don't like Etsy. Their valuation is ridiculous! It’s got an 82x “Price-to-Earnings” ratio. I mean, come on. How do you justify that? And the stock price. They're up 30% in just six weeks and the forward growth expectation is 20%.

So, why would I say we should look at a company that looks classically overvalued? I'll tell you why. First of all, that bubbly price, that 30% jump, that's because their earnings almost doubled last quarter. So they released that information a few weeks ago.

When people said, “Wait a second, let me go back and understand this. You mean for every dollar coming in, you're not making twice as much profit? How is that possible?”

Well, I'll tell you how! It goes back to the fact that they're generating a lot more revenue per employee.

They're slimmer. They've got a better handle on their marketplace, and it's working. And they're getting margin expansion like you wouldn't believe.

So this 82x P/E ratio might come down really fast. And remember, this is a young company. Young companies frequently get higher P/E valuations, especially when they're growing fast. That P/E is likely to fall pretty fast.

I'm looking at this quarter though. 20% forward growth? I think they're growing a lot more. And I think their profits are a lot stronger than their competition. And that makes me wonder — at what point does Amazon raise their hand and say, “It’s time to take you guys out and buy you out”?

So this is a very risky move because of the valuation, because they’re set up where they've got to win everywhere. But I believe the following is what's going to make these guys a trade that we want to do:

Number one, the money that consumers are spending is going to this sector, this e-commerce Non-store Retailers sector.

Number two, they’re a prime beneficiary. They have a lean machine that’s bringing in a lot more money, and they're enjoying the Amazon-level of growth without the Amazon-level of costs.

So therefore, lastly, I believe that's going to translate into margin expansion and a surprise upside, not just this quarter, but going forward.

So, take a look at Etsy and consider them.

And by the way, if you don't like Etsy, and you’s prefer to go into something a little bit more tame, try Amazon. Amazon is also growing. It just takes a lot more to move that “Queen Elizabeth cruise ship.”

Etsy is still young — not even yet a billion dollars in sales per quarter. I think they've got the growth potential

Zatlin out. We'll talk to you soon.

In it to win it,

Moneyball Economics