Etsy Inc. (NASDAQ: ETSY) spent $1.625 billion for the British platform in June. Naturally, investors will wonder if Etsy is making a brilliant move or if the craft site is desperately seeking new markets.
Depop is a British platform that sells used clothing and accessories under the guise of fashion. To me, Depop looks like a car boot sale or a jumble (British slang for a garage sale) for Generation Z. IE a place for broke club kids to sell their old stuff for cash.
Recode’s Rebecca Heilweil speculates Etsy’s management is trying to market to Generation Z (people under 30) through Depop. Statistics support Heilweil’s argument, Statista estimates 48.8% of Depop’s US active users are between 20 and 29.
Why does Etsy want Depop?
In addition, Statista estimates 34.6% of Depop’s active American users are 19 or under. In comparison, Statista calculates 11% of Depop’s US users are between 30 and 39 and 5.7% are over 40.
I am skeptical of the youth marketing claim, because younger people have less money. Notably, college students and young professionals are often broke and most teenagers have no money. In particular, competing for teenagers’ allowance money sounds unprofitable to me.
Moreover, youth marketing is often a sign of a dying retailer. To elaborate, management tries to remain relevant by projecting the illusion of youth and hipness. Note, youth and hipness almost never generates additional revenue.
I think a more probable claim is that Etsy management thinks Depop can expand their presence on video channels such as YouTube, Instagram, and TikTok. Depop sellers often market through YouTube and TikTok.
Etsy wants TikTok, Instagram, and YouTube not Depop
There is a growing community of reusers and resellers who peddle old clothes through TikTok and other platforms, Bloomberg Opinion’s Lara Williams observes. However, that community only reaches people under 30. My guess is Etsy managements want to expand Depop’s reach to people over 30 who have more money.
That could be a smart strategy because of YouTube, Instagram, and TikTok’s enormous reach. Statista estimates Alphabet’s (GOOGL) YouTube was the second largest social media with 2.291 billion users in April 2021. Meanwhile Facebook’s (FB) Instagram had 1.287 billion users in April 2021 and TikTok had 732 million users in April 2021.
Plus, TikTok grows at an incredible rate. Statista estimates TikTok grew by 88.8% in 2019 and 85.3% in 2021. However, Statista predicts TikTok’s growth will fall to 11.8% in 2021, 81.% in 2022, and 5.1% in 2024.
Why Etsy Really wants Depop
My suspicion is that Etsy (ETSY) managers think Depop has the secret of marketing through video social media. Hence, they want to adapt that method to reach a larger audience. For example, the adapt Depop’s video marketing to Etsy’s arts and crafts project.
To explain, Etsy management does not want the Generation Z fashionista who shops on Depop. Instead, they hope to reach the fashionista’s mother through Depop’s marketing methods.
Depop is a niche a player in online retail, however it reaches a global market. The Wall Street Journal estimates Depop had 30 million users in 150 countries in June 2021. However Depop only had four million active buyers and two million sellers in June 2021.
I think the figure that attracted Etsy Chief Executive Josh Silverman is that 75% of Depop’s users are also buyers. Silverman wants Depop’s plan for building a video-driven marketplace so he can adapt it to Etsy.
Etsy is growing fast
Etsy (NASDAQ: ETSY) grew fast during the pandemic. Statista estimates that the number of Etsy buyers grew from 46.35 million in 2019 to 81.9 million in 2020.
Furthermore, the number of Etsy buyers grew from 9.32 million in 2012 to 81.9 million in 2020. Moreover, Stockrow estimates Etsy’s revenue growth at 141.45% in the quarter ending on 31 March 2021.
In fact, Stockow reports Etsy’s revenues grow by over 100% for four straight quarters. In detail, Etsy’s reveneus grew by 136.75% in the quarter ending on 30 June 2020, 128.08% in the quarter ending on 30 September 2020, and 128.65% in the quarter ending on 31 December 2020. Thus, Etsy is capable of enormous growth and its management knows how to leverage acquired platforms.
Notably, Etsy’s big 2020 growth came after it bought the musical instrument platform Reverb in 2019. Reverb is a marketplace for used and new instruments and accessories.
Mr. Market thinks Etsy could get another spurt of growth from the Depop acquisition. For instance, Mr. Market paid $156.59 for Etsy on 13 May 2021 and $202.94 for ETSY on 29 July 2021.
I think Silverman and Mr. Market think the used clothing marketing will grow fast because of the economy. Silverman could think the demand for used items could grow because of inflation and trade wars or supply chain problems.
Is Inflation good for Depop and Etsy?
In particular, trade wars or supply chain difficulties could cut off the flood of cheap clothing and consumer goods from China.
Similarly, inflation or stagflation could make some new consumer goods too expensive for many people. For example, CNN claims US consumer prices rose by 5.4% in June 2021, the biggest monthly price rise in almost 13 years.
Notably, high prices make it harder for young people with lower incomes who want to look fashionable. Hence, more shoppers on Depop.
Under those circumstances, platforms that could sell used items such as Etsy, Reverb, and Depop could experience growth. There is circumstantial evidence that demand for second-hand products is high. CNN reports consumers are complaining about outrageous used car prices, for instance.
Why Etsy needs to Grow
I think Etsy Inc. (ETSY) needs to grow because it makes small amounts of money. For example Etsy reported quarterly revenues of $550.65 million, a quarterly gross profit of $407.73 million, and a quarterly operating income of $150.64 million on 31 March 2021.
In comparison, Amazon (AMZN) reported quarterly revenues of $108.518 billion, a quarterly gross profit of $46.115 billion, and a quarterly operating income of $8.865 billion on 31 March 2021. This creates problems because I consider Amazon Etsy’s biggest competitor.
Moreover, Etsy reported a quarterly operating cash flow of $148.44 million and a quarterly ending cash flow of $1.169.02 billion on 31 March 2021. Comparatively, Amazon (NASDAQ: AMZN) reported a quarterly operating cash flow of $4.213 billion and a quarterly ending cash flow of $34.155 billion on 31 March 2021.
Finally, Amazon reported $73.569 billion in cash and short-term investments and total assets of $323.077 billion on 31 March 2021. Yet, Etsy reported $1.666 billion in cash and short-term investments and total assets of $2.497 billion on the same day.
I conclude Etsy cannot compete with Amazon because Amazon’s resources are far greater. One obvious threat to Etsy is that Amazon can set up its own used products or crafts platforms and have them lose money for years to drive Etsy out of business.
Mr. Market overprices Etsy
Ultimately. I conclude Mr. Market grossly overprices Etsy (ETSY). In particular, I see nothing in Etsy’s financial numbers that justifies the $202.94 28 July 2021 share price.
I think investors need to avoid Etsy because I think it will never make enough money to justify the current share price. Expect Etsy’s market capitalization to collapse once Mr. Market realizes it will never make enough money to justify the share price.