Thread by @LSValue

My $ETSY Long Thesis:

▪️ Covid pulled forward significant demand
▪️ High Margin stable and growing core Etsy Platform
▪️ House of Brands expands TAM at reasonable valuation due to synergistic back office cost sharing
▪️ Cheap on a go forward basis 33x F EV/EBITDA

Etsy is an eCommerce website that allows makers of custom goods to easily transact on the internet without setting up their own website. Etsy is a niche marketplace for quality handmade products in categories like Home Furnishing, Apparel, Jewelry, and Craft Supplies.

At the beginning of the Covid outbreak in 2020, Etsy saw a huge surge in the sale of masks as mask mandates were established globally. This was in part due to the lack of masks available through normal supply chains as well as the lack of fashionable or comfortable masks.

Since then their Mask GMS has fallen, leading to a narrative that the company would struggle once masks were no longer mandated. What that narrative missed is people turned to Etsy to buy masks, but they didn’t just buy masks, many returned to make purchases in other categories

Masks were an entry point for new customers to discover Etsy as well as brought back previous customers. At the peak of Covid mask mandates masks represented 14% of Esty’s GMS, which is now down to 2.5% of GMS in Q1 2021, but their overall sales is still growing at 138% YoY

COVID had a lasting and significant pull forward effect on Esty growth and demand profile which seems to be enduring past COVID.

Etsy platform resilience and long term growth potential are highlighted by how the business has performed during Covid, but on top of that they have built a niche marketplace that is hard to replicate.

Many investors once thought that Etsy was doomed once Amazon started “Handmade by Amazon” to directly compete in the handmade ecommerce space. But Handmade by Amazon has struggled at disrupting Etsy core business since it launch in 2015.

Handmade by Amazon was in the end not a comparable experience for either buyers or sellers for several reasons, the most important being customer focus and UI/UX. Etsy platform and additional services (like ads) outweighed the offering by Amazon.

Etsy has begun to develop what it calls its “House of Brands” strategy. Esty has made 3 acquisitions in the last 9 months with Reverb, a Musical Instrument and Equipment marketplace, Depop, a high end fashion marketplace, and ELO7, an Etsy like ecommerce site based in Brazil.

Etsy’s house of brands strategy will leverage their own knowledge within the ecommerce marketplace while adding value through centralizing many back office and system costs, which will improve the profitability of the businesses that they buy.

This strategy kind of reminds me to the Buy & Build strategy that companies like Watsco and Pool Corporation in a few ways that has been very successful at compounding investor capital for many years. I expect Etsy will be an incredible long term growth compounding machine.