• Etsy benefitted from the COVID driven e-commerce boom, but the company is well positioned for continued success in 2021.
• Company boasts several important competitive advantages: unique assortment (incl. personalization, connections with sellers), network effects, socially conscious culture, and strong management team.
• Etsy still only commands a fraction of its total addressable market so it has a long runway of growth ahead.
• The Etsy marketplace is just getting started in becoming a mainstream destination for buyers who are increasingly looking for special, unique items when shopping online.

Etsy (NASDAQ:ETSY) is a two-sided online marketplace focused on unique, handcrafted and vintage goods. It is the fourth largest e-commerce site in the United States, behind Amazon (AMZN), eBay (EBAY), and Walmart (WMT) with almost 70 million active users and 3.7 million active sellers.

Unique offerings, a reputation for selling high-quality craft products and a focus on human connections between buyers and sellers differentiate Etsy from other "mass online" retailers. Products sold on the marketplace have a personal touch not found on other online retailers since the vast majority (80%) of Etsy sellers are one-person businesses.

While Etsy was growing at respectable rates before COVID-19, the e-commerce boom caused by the pandemic is an important inflection point for the company's trajectory. Since the end of 2019, Etsy has added 23 million active buyers (+50% vs the end of the year) and 1 million active sellers (+37%). As a result, Etsy has a tremendous opportunity to convert these new users into repeat customers and accelerate growth. Given different initiatives that current management had put in place before the pandemic, I believe the company is in a great position to capitalize on this massive influx of new traffic.

Etsy boasts several key competitive advantages as well. Etsy's marketplace business model is highly scalable and benefits from network effects: the more users, the better the platform gets. Its differentiated product assortment (much of which can be customized) stands out compared to mass e-commerce sites that sell largely the same products and brands. Lastly, the pandemic proved that Etsy sellers can adapt quicker than any large corporation in anticipating new trends (like masks and breadmaking).

In 2020, Etsy is expected to clear around $10 billion in gross merchandise sales (GMS), which still only represents a tiny fraction of its market opportunity. At $24B market cap, the company is only getting started. With a strong management team that has delivered results since taking over in 2017, I believe the company will continue to execute its mission of "keeping commerce human" and also rewarding long-term shareholders.

Business

Etsy has two online properties: Etsy and Reverb. Reverb is a marketplace for buying and selling musical instruments that Etsy acquired in August 2019 (it's a very small portion of total GMS and revenues). Etsy started as a website, but the majority of its visits and sales (60%+) now come from their mobile Etsy app.

Buyers can find all sorts of items on Etsy, with pretty much every major category covered except for consumer electronics. The largest categories on the marketplace are homewares & home furnishings, jewelry & accessories, craft supplies, apparel, paper/party supplies and beauty/personal care. These top six categories represent nearly 80% of total sales, but the breadth of items available on Etsy is quite expansive. Based on a quick search, I found there are over 80,000 listings for dog treats (compared to 9,000 at Chewy.com (NYSE:CHWY)), over 12,500 listings for "office desks" above $250 (compared to 10,700 at Wayfair.com (NYSE:W)) and 140,000 listings for "formal dresses" (compared to 1,800 styles on ASOS, an online fashion and cosmetic retailer).

Source: Etsy Investor Day 2019 Presentation