The biggest victims of Amazon’s (NASDAQ: AMZN) success have been niche internet retailers not brick and mortar stores as is widely believed. One brand that is clearly in the Everything Store’s crosshairs is Etsy (NASDAQ: ETSY).
The do it yourself marketplace has been surviving but having a very rough time lately. It reported a loss of -$12.53 million on June 30, 2017, according to ycharts. Disturbingly that was a bit improvement over March when Etsy reported a negative net income of -$31.51 million on June 30, 2017, and -$17.24 million in June 2016.
The -$12.53 million loss is actually an improvement because ycharts data reveals that Etsy has never generated any net income. Since ycharts first started tracking the company back in December 2015, it has already operated at a loss.
Can Etsy Ever Make Money?
Etsy’s inability to make money raises the disturbing question; can anybody compete with Amazon or for that matter with eBay (NASDAQ: EBABY)? Perhaps Walmart (NYSE: WMT) can but the available data shows us that Etsy cannot.
Some of Etsy’s problems include:
- $43.17 million in cash from operations on June 30, 2017, this number was down from $46.76 million in December 2016; and $47.25 million in March 2017. If those figures are accurate Etsy’s “boost” from the holidays was around $3 million. The cash from operations is up from last year when it was $34.16 million.
- $5.391 million in cash from financing on June 30, 2017, a sure sign that Etsy is borrowing money to cover the cost of its operations.
- $14.15 million in cash from investing on June 30, 2017, another indication that Etsy is borrowing money to pay the bills.
- Assets of just $554.32 million on June 30, 2017, this was down from $581.19 million in December but up from $550.96 million in June.
- $297.24 million in cash and short term investments on June 30, 2017.
- Revenues of $396.35 million on June 30, 2017. This is the only really positive number at Etsy. The revenues were up from $380.35 million in March 2017 and $320.79 million in June 2016.
- A free cash flow of $8.598 million on June 30, 2017.
- A market capitalization of $1.842 billion on August 18, 2017.
- An enterprise value of $1.555 billion on August 15, 2017.
Those numbers gave investors the results you might expect they were punished with a return on equity of -3.96% on June 30, 2017, and a stock price of $15.58 on August 18, 2017. After reading these one has to wonder why Etsy stock is traded at all this equity is doing absolutely nothing for investors except losing them money.
Etsy is Incapable of Making Money
Etsy has proved it is incapable of making money and demonstrated that online companies can fall into a familiar retail trap.
The trap is the old one of ever-increasing sales that generate no real money. Dozens of retailers; ranging from Whole Foods to Rite Aid to Overstock.com, have fallen into over the years. The only way a company can profit from this trap is to sell itself to a larger retailer or private equity organization in search of market share or other resources.
The clear implication from the financial numbers is that Etsy can expand its business but not make any money from it. Therefore Etsy’s main value would be as a marketing or distribution channel for another company that actually makes money such as eBay, Alibaba (NYSE: BABA) or Walmart.
So Who Will Buy Etsy?
Buying Etsy would make a lot of sense for eBay; which has a similar business model and is suffering from a loss of credibility among online merchants. It would also make some sense for Alibaba which is having a difficult time tapping the American mainstream.
Walmart is a dark horse, but remember the retail giant has been making some really weird acquisitions lately. The big box king snapped up Modcloth and Bonobos; deals that make a little sense, and Moosejaw which makes no sense. Therefore a Walmart move on Etsy is more probable than you might think.
Remember Walmart is building up its own marketplace which is a major threat to Etsy and to eBay. The Etsy merchants might be a smart audition to Walmart’s ecosystem if they can be convinced to play ball.
Will Etsy Ever Make Money?
This brings us to another interesting question: can Etsy ever make money? The answer is perhaps if it gets creative, there are a number of potential ways Etsy can generate additional revenue.
An intriguing option would be to expand its acceptance of cryptocurrencies. Some Etsy accepting Bitcoin but why not expand it to include the fast growing alternatives. Also why not add bitcoin to Etsy’s payment infrastructure.
Some good possibilities would include; Ethereum, NEO, Litecoin and maybe DASH. This would certainly appeal to the hip-Millennial DIY crowd that loves Etsy and generate enormous street cred with Geeks of all stripes.
Etsy would attract a lot of publicity if it became the first well-known retailer to start accepting DASH, NEO, Litecoin or Ethereum payment or better all four. This might also open new markets in developing nations where cryptocurrency is growing in popularity.
Other possibilities might include brick and mortar pickup options and offbeat delivery alternatives. A fascinating possibility would same-day delivery via Uber, Deliv, Lyft or even GrubHub (NYSE: GRUB) in select markets.
A few options for making money at Etsy might include lending money to merchants or factoring like that which Payfully does for Airbnb hosts. Factoring is advancing cash against unpaid invoices and it can be lucrative.
Investors need to stay away from Etsy because this company needs to change its business model or become part of a larger organization. If it does not Etsy is doomed.