ETSY: Etsy vs. Wayfair: Which Stay-at-Home Stock is a Better Buy?

Etsy, Inc. (ETSY) and Wayfair Inc. (W) are two of the world’s fast-growing e-commerce platforms. While ETSY is focused on handmade or vintage items and craft supplies, W is focused on selling furniture and home-goods. With people spending more time at home by will or by order, both ETSY and W have been witnessing a significant rise in their active users and product sales.

Both stocks have generated significant returns over the past five years. While ETSY returned 1553.6% over this period, W gained 577.4%. In terms of year-to-date performance, ETSY is a clear winner with 216.2% returns versus W’s

Latest Movements

On November 12th, ETSY announced its annual Cyber Week Sales Event. Starting today till December 2nd, this year the formerly eight-day event is extended to ten days. Shoppers with the Etsy app will have exclusive, early access to the sales event beginning today, while the full sales event will start on November 25th. Shoppers will be able to find discounts up to 60% across all categories.

Earlier this month, ETSY announced that it has joined forces with Roller Rabbit, the iconic lifestyle brand known for its ready-to-wear and feel-good sleepwear, to launch a colorful, limited-edition tablescape and entertaining line featuring the Roller Rabbit x Etsy collection.

Last month, ETSY introduced the option of ‘Buy Now, Pay Later’ with Klarna to make it easier for the buyers to manage expenses during the holiday season.

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W conducted its Way Day 2020 sales event from September 23rd to 25th. Shoppers took advantage of the free shipping and up to 80% off of the best-selling products from all major categories. In September, Kelly Clarkson curated the Wayfair collection, Kelly Clarkson Home which includes more than 1,300 products.

A couple of months back, Citigroup, Inc. (C) won the rights to offer a pair of new credit cards with W. C also offers a store card that works only at W and offers 5% in rewards on eligible purchases. Earlier this month, W named Michael E. Sneed, Executive Vice President of Global Corporate Affairs and Chief Communication Officer of Johnson & Johnson (JNJ) to its Board of Directors.

Recent Financial Results

ETSY’s revenue surged nearly 128% year-over-year to $451.5 million in the third quarter ended September 2020, primarily driven by the company’s focused execution, engagement with its buyers and sellers, and the unique inventory in its marketplace.

The company’s gross merchandise sales (GMS) increased 119.4% year-over-year to $2.6 billion. While the number of active sellers increased 42% year-over-year, the number of active buyers increased by 55.4% year-over-year to 69.6 million. Net income increased 520% year-over-year to $91.8 million. EPS increased by 483.3% year-over-year to $0.70.

W’s revenue increased 66.5% year-over-year to $3.8 billion for the third quarter ended September 2020. International net revenue increased by 66.7% year-over-year to $564.7 million. The number of active customers in direct retail business increased by 50.9% year-over-year to 28.8 million. The company reported a net income of $173.2 million as compared to a net loss a year ago. EPS was reported to be $2.30 which is an improvement over the loss per share last year.

Past and Expected Financial Performance

ETSY’s revenue grew at a CAGR of 49.2% over the past 3 years. The market expects the company’s revenue to increase 87% in the fourth quarter ending December 2020, 97.1% in the current year, and 12.1% next year. ETSY’s EPS is expected to grow 132% in the fourth quarter, 300% for the quarter ending March 2021, and 175% this fiscal year. Moreover, its EPS is expected to grow at a rate of 57.1% per annum over the next five years.

On the other hand, W’s revenue grew at a CAGR of 45% over the past 3 years. The market expects W’s revenue to increase by 46.9% in the fourth quarter ending December 2020, 55.8% in the current year, and 12.6% next year. The company’s EPS is expected to grow 127.5% in the fourth quarter, 91.7% for the quarter ending March 2021, and 155.3% this year. Moreover, W’s EPS is expected to grow at a rate of 30% per annum over the next five years.

Thus, ETSY has an edge over W here.

Profitability

W’s trailing-12-month revenue is 9.43 times what ETSY generates. However, ETSY is more profitable with a gross margin of 70.6% versus W’s 27.9%.

Moreover, ETSY’s ROE of 43.9% compares favorably with W’s 15.8%.

Valuation

In terms of forward P/E, W is currently trading at 55.86x, only 0.2% more expensive than ETSY which is currently trading at 55.76x. Moreover, ETSY is more expensive in terms of trailing-12-month P/S (12.13x versus W’s 1.83x), and its forward PEG of 1.95x is 4.8% higher than W’s 1.86x.

In terms of trailing-12-month price/cash flow as well, ETSY’s 34.37x is 60.6% higher than W’s 21.40x.

Though ETSY looks much more expensive compared to W, it’s worth paying this premium considering ETSY’s significantly higher earnings growth potential.

POWR Ratings

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

ETSY has a “B” for Trade Grade, and Buy & Hold Grade, a “C” for Peer Grade, and an “A” for Industry Rank. It is currently ranked #15 out of 58 stocks in the Internet industry.

W holds a “D” for Trade Grade and Peer Grade, and a “C” for Buy & Hold Grade and Industry Rank. It is currently ranked #12 out of 36 stocks in the Specialty Retailers industry.

The Winner

Both ETSY and W are good investment bets considering their market dominance and huge user base. However, ETSY appears to be a better buy despite trading at a marginally higher valuation based on its higher earnings growth potential and innovative and unique products.

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ETSY shares were trading at $142.86 per share on Monday morning, up $2.80 (+2.00%). Year-to-date, ETSY has gained 222.48%, versus a 12.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...