Summary
- Marketing costs in relation to gross merchandise value continue to rise.
- The company is facing significant headwinds in the post-COVID-19 world.
- Etsy's current return on invested capital is not maintainable and this can pressure the stock.
- In the long term, Etsy continues to face intensified competition in the e-commerce space.
Etsy's (ETSY) stock has performed phenomenally during the COVID-19 crisis, though investors should be worried about how Etsy's business model will endure a post-COVID-19 world.
(Source: Seeking Alpha)
Great growth during COVID-19
Etsy's standalone marketplace grew gross merchandise value - GMS - by 116% YoY during Q3 2020. Due to the COVID-19 crisis, people stayed at home significantly more often than in the pre-COVID-19 era; this obviously benefits an online marketplace like Etsy.
With BioNTech's (NASDAQ:BNTX) vaccine showing an effectiveness rate of 90%, more than ever, the world seems to be ready to return to normal. And I opinionate that returning to normal implies that Etsy returns to mediocrity: a company that is struggling to maintain margins while growing its revenues.
(Source: Data from Seeking Alpha, visualized in Excel)
Marketing costs
As discussed in-depth during my previous article addressing Etsy, I stated that the company would experience intensified competition in the long term. In short, platforms like Pinterest (NYSE:PINS), Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) are Etsy's biggest traffic sources and Etsy's biggest competitors at the same time. Sellers can start selling their products directly on Facebook and Instagram at much lower commissions, and these platforms are huge traffic drivers to Etsy's website.
Companies like Facebook and Alphabet have been able to lower their traffic acquisition costs, TAC, significantly over the years due to their moats. On the other hand, Etsy's TAC is actually increasing - showcased by its rising marketing expenses as a % of GMS. In my last article, I stated:
I suspect that marketing costs in relation to GMS will grow quite meaningfully going forward. This can put pressure on margins."
In Q3 2020, Etsy's GMS was $2,633,927, and Etsy's marketing expenses accounted for $126,779. I can conclude that marketing as a % of GMS makes up 4.8% - a sharp rise in comparison to the previous quarters.