Etsy (NASDAQ: ETSY) is growing like a weed but it’s not making any money. The latest round of financial numbers casts serious doubt on the online arts and crafts marketplace’s business model.
Etsy’s growth has been phenomenal; its revenues grew by $92.13 million in the year that ended on September 30, 2016. That does not sound like much until you realize that Etsy reported $342.65 million in revenues at the end of third quarter 2016. The revenues are not great but they are increasing by around $100 million a year.
The company’s ecosystem is also growing substantially. The number of Etsy sellers expanded from 830,000 in 2012 to 1.074 million in 2013, to 1.353 million in 2014 and 1.563 million in 2016 according to data provided by our friends at Statista. From those numbers it looks as if Etsy’s growth is slowing.
This indicates that the company’s potential market is very limited. The demand for customized jewelry and hand-knitted socks might not be as great as some people assume.
The niche Etsy is filling is not that big and it might already be saturated. If that is the case Etsy might be doomed because it is not making that much money.
Is Etsy Doomed?
Etsy’s financial numbers show us why this this might be a doomed company or at least one with a limited future. Some of the ugly highlights from Etsy’s third quarter financial numbers include:
- A negative profit margin of -2.74%.
- A negative Earnings Per Share Ratio of -.07
- A negative net income of -$12.74 million.
- A negative free cash flow of -$1.499 million.
- Generating $38.44 million in cash from operations.
- Generating $4.318 million in cash from financing.
- $270.37 million in cash and short-term investments.
- $529.2 million in assets
- $224.74 million in liabilities.
These numbers indicate that Etsy is operating on a very narrow margin. It might not be generating enough cash to stay in business without borrowing or attracting venture capital right now.
Such numbers might be fine for a pre-IPO unicorn, but they’re horrible for a publically traded company. To me at least Etsy looks like a circa 1999 dot.com company that is ready to go crash. All it would take is one negative earnings report or some really bad news to send Etsy spinning into the death spiral.
Can Etsy Survive?
My guess is that the momentum from the revenue and market growth is the only thing sustaining Etsy. If that stalls, or even slows down the company is finished. There is simply nothing else to sustain it the business is not generating enough cash to operate on its own.
Therefore my prediction for Etsy is acquisition, being bought by a larger more successful online retailer. The most likely buyers are Alibaba Holdings Group (NYSE: BABA) and Japan’s Rakuten. Rakuten in particular is a real bottom feeder that is constantly gobbling up failed ecommerce ventures.
Other possible buyers include eBay (NASDAQ: EBAY); which is making money despite its struggles, Overstock.com (NASDAQ: OSTK) and Amazon (NASDAQ: AMZN). Whether any of these companies would want Etsy is beyond me.
A major problem is that Etsy’s business is not necessarily compatible with more traditional online retailers. Most of the companies listed here work with small sellers but few dabble in the arts and crafts segment.
Another obstacle to an Etsy acquisition is that its business would be fairly easy for a company like Amazon or eBay to duplicate. Amazon has launched a section for handmade goods in Europe. Alibaba and eBay might follow at some point.
Etsy is a Terrible Investment
Acquisition might be in the future because Etsy’s financial performance is pretty terrible. A big reason for that is Etsy’s stock, which is a horrible investment.
Etsy investors were punished with a return on equity of -3.84% on September 30, 2016. That might be palatable if Etsy paid a dividend which it does not.
To make matters worse its stock is falling to new lows; such as $11.75 a share on November 7, 2016. All the share gains ETSY experienced over the past year are slowly and effectively being erased.
My prediction is that Etsy’s share price will keep falling because despite its revenue growth the company is not making any money. At some point this stock might fall into the junk category and the company will disappear into acquisition.
It might be possible to make money by selling stuff on Etsy but its stock is a terrible investment. I would suggest Etsy sellers invest their money in eBay, which is making some money from its business, if they want to buy an online retailer.
Disclosure: the Blogger owns shares of eBay.