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Etsy: Conversion Is Key. Short-Term Pressure = Opportunity.

Etsy is a two-sided marketplace for unique and special items. As of 3Q19, it has 45 million active buyers and 2.4 million active sellers, up 21% and 17% y/y, respectively (excluding Reverb). Etsy processed $4.5B in GMS in the twelve months ending 9/30/19, growing 21% y/y. It generates revenues from listing fee (13%), transaction fee (30%), Etsy Payments (30%), and marketing and shipping services (26%). Network effect/scale and captivity characterizes its competitive advantage.

Etsy stock trades on GMS growth and potential profitability. Management has a few initiatives that aim at driving growth: 1) free-shipping initiative launched in 3Q19 encouraging sellers to offer free-shipping for orders over $35; and 2) Etsy Ads launched in September 2019 to combine Promoted Listings (sellers pay Etsy to display items higher in search results) and Google Product Listing Ad (sellers pay Etsy to bid for keyword ad through Google) into one advertising platform. These initiatives are expected to generate GMS growth by increasing conversion rate and seller marketing spending.

In 3Q19, Etsy reported that initial results from its free-shipping initiative were below expectations. Sellers only passed on 60% of shipping cost to buyers compared to 84% in tests, leading to an unexpected -100 bps GMS headwind in FY19. Etsy was also hurt by state sales tax increases in 11 states, including California and Texas, that represent 34% of US GDP, resulting in another -100 bps headwind. These developments led the stock to trade off -25%.

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