ETSY: Etsy vs. eBay: Which Stock is a Better Buy?

The e-commerce industry has been hard hit by the news of Pfizer, Inc. (PFE) and BioNTech SE’s (BNTX) vaccine. Online shopping’s acceleration will slow as in-person shopping returns. Companies such as eBay, Inc. (EBAY), and Etsy, Inc. (ETSY) have declined following the news release.

However, the pandemic has brought about a permanent change in the spending pattern of people, which is expected to help e-commerce sites retain their user base and financial margins in the long run, allowing EBAY and ETSY to shrug off the short-term losses.

Both companies generated decent returns over the past five years. While ETSY gained 1,306.7% over this period, eBay returned 59.7%. In terms of year-to-date performance as well, ETSY is the clear winner with 169.6% gains versus EBAY’s 28.9% returns.

But which stock is a better buy now? Let’s find out.

Latest Developments

ETSY also undertook several measures to capitalize on the pandemic and boost its sales over the past couple of months. In August, the company raised $650 million through senior notes offering. A portion of the proceeds is expected to fund the company’s issuance of common stock to replace convertible senior notes.

ETSY updated its website to enhance its user-friendliness, attracting a higher number of potential consumers. The improved site performance, relevant recommendations through machine learning algorithms, and innovative marketing strategies have increased consumer retention, as well as the percentage of active buyers.

EBAY launched a ‘Certified Refurbished’ feature on its website, to facilitate the sales of refurbished items of the most popular brands across the world. This comes in after the company’s extensive research report showed that 80% of Americans are open to receiving a refurbished electronic gift during the holiday season.

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The company also launched an ‘Authenticity Guarantee’ service on its sneakers costing over $100, as it is the highest-selling product for the e-commerce site. EBAY currently sells a sneaker every 1.5 seconds and is expected to witness a higher sneaker turnover following this feature roll out by early 2021. EBAY launched a similar authenticity guarantee feature on watches costing more than $2,000 in September.

Earlier in September, eBay announced the expansion of its management of payments service to Italy, Spain, and France. This move should allow sellers to streamline their payment methods while giving buyers multiple options for making payments. Expected to be available from early 2021, this move should increase the company’s sales in the European countries.

On September 2nd, eBay partnered with United Parcel Service for quick and efficient delivery of packages interstate, as well as expanding the shipping options globally.

Recent Financial Results

ETSY’s general merchandise volume increased 119.4% year-over-year to $2.63 billion in the third quarter ended September 2020. Revenue grew 128% from the year-ago value to $451.48 million, while net income grew 520% from the same period last year to $91.76 million. EPS rose 525% year-over-year to $0.75.

eBay’s gross merchandise volume rose 22% year-over-year to $25 billion in the third quarter ended September 2020. Revenue increased 25% from the year-ago value to $2.60 billion, while net income increased 114.2% from the prior-year quarter to $664 million. EPS grew 154.5% from the same period last year to $0.95.

Past and Expected Financial Performance

ETSY’s revenue and EBITDA increased at a CAGR of 49.2% and 114% respectively, over the past three years. The company’s leveraged free cash flow grew at a CAGR of 102.2% over the same period. Comparatively, eBay’s revenue and EBITDA rose at a CAGR of 7.1% and 8.2%, respectively over the past three years. The CAGR of its leveraged free cash flow has been 7.6%.

ETSY’s EPS is expected to increase by 132% in the current quarter, 175% in the current year, 3.3% next year, and at a rate of 57.1% per annum over the next five years. Analysts estimate revenues to grow 69.2% in the next quarter ending March 2021, and 12.1% next year.

Analysts expect EBAY’s EPS to increase 25.8% in the current quarter, 48.5% in the current year, 8.8% next year, and at a rate of 18.1% per annum over the next five years. Consensus revenue estimates indicate a 6.4% improvement in the next quarter, and 7.8% next year.

Profitability

EBAY’s trailing 12-month revenue is 8.55 times what ETSY generates. EBAY is also more profitable with a gross margin of 77.5% compared to ETSY’s 70.6%.

Furthermore, EBAY’s ROE and ROA of 81% and 10.2% compare favorably with ETSY’s 43.9% and 9.8%, respectively.

Valuation

In terms of forward non-GAAP P/E, ETSY, currently trading at 47.55x, is 250.9% more expensive than EBAY, which is currently trading at 13.55x. ETSY is also more expensive in terms of trailing 12-month PEG (0.52x and 0.21x) and Price/ Sales (10.34x versus 2.92x).

POWR Rating

While ETSY is rated “Buy” in our proprietary POWR Rating system, EBAY is rated “Neutral”. Here’s how the four components of overall POWR Rating are graded for both these stocks:

ETSY has an “A” for Industry Rank, “B” for Trade Grade and Peer Grade, and “C” for Buy & Hold Grade. It is currently ranked #10 out of 58 stocks in the Internet industry.

EBAY has an “A” for Industry Rank, and “C” for Trade Grade, Buy & Hold Grade, and Peer Grade. It is currently ranked #18 in the same industry.

The Winner

ETSY, specializing in vintage and handmade products, has a higher chance of emerging from the recent sell-off. The stock declined by 1% following the news of the vaccine, primarily because its unique business model should allow the company to maintain its sales level. EBAY, on other hand, deals in standard retail items, and hence is more susceptible to a slowdown in business volume once social distancing norms are relaxed. Also, several other industry giants have international supply chains that have merged as major contenders of EBAY, posing as a major threat to the company’s long-term growth potential. Hence, ETSY is the better buy here.

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ETSY shares were trading at $130.01 per share on Wednesday afternoon, up $10.58 (+8.86%). Year-to-date, ETSY has gained 193.48%, versus a 12.33% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...