The last year was undisputedly the year of tech stocks. While almost the entire world was locked at home, technology products and services were leveraged to make lives easier. Retail consumption also underwent a massive shift due to the transition towards online shopping.
As retail stores were shut, people had no option but to shop at digital storefronts, rather than traditional brick-and-mortar stores. This caused several companies to increase their online presence to ensure their survival and this trend benefitted e-commerce companies significantly.
The case for Etsy
Etsy is a global marketplace for people to buy and sell unique goods and products. The company has grown both its buyer and seller base successfully over the years which has helped its revenue soar at a rapid pace.
In 2017, Etsy generated sales of $441.2 million. In the last 12-months prior to Q3 of 2020, its sales were up over 200% at $1.4 billion. Comparatively, its free cash flow rose by 800% from $56 million to $507 million in the same period.
Etsy’s GMS (gross merchandise sales) has now accelerated for eight consecutive quarters due to its expanding ecosystem of buyers and sellers. It also shows how Etsy is focused on monetizing its user base.
Despite its enviable growth in top-line, Etsy’s management said the total addressable market for the company is forecast to reach $437 billion by 2023 which means this stock needs to be on the radar of growth investors.
Shares of Etsy have risen by 650% since it went public back in April 2015, easily crushing the broader markets. This means the company is valued at a market cap of $28.5 billion, indicating a forward price to 2021 sales multiple of 15.7x and a price to earnings multiple of 104x which is steep.
The case for ContextLogic
An e-commerce company valued at a market cap of over $16 billion, Wish, trades on the NASDAQ under the parent company ContextLogic. The stock went public on December 16, 2020, and lost 16% in market value on the first day. ContextLogic stock is currently trading at $28.68 which is higher than its IPO price of $24.
Wish was founded in 2010 and is now one of the fastest-growing e-commerce platforms that connects over 100 million monthly active users (MAUs) in 100 countries to more than 500,000 merchants around the world.
The company has successfully created a discovery-based and highly personalized mobile shopping experience. It sells a range of clothing, electronic, and beauty products at wholesale prices which means it is targeting price-sensitive users.
According to the company’s presentation, around 44% of shoppers in the U.S. are value-conscious customers with incomes below $75,000 per year. This figure for Europe stands at 85%. Similar to Etsy and other online peers, Wish has also grown top-line at a fast clip.
In 2015 total sales stood at $144 million and rose 11x to $1.9 billion in 2019. Wall Street analysts expect sales to touch $2.48 billion in 2020 and $3.15 billion in 2021. It suggests ContextLogic stock is trading at a price to 2021 sales multiple of 5.2x which is significantly lower than Etsy’s.
Both Etsy and ContextLogic are part of rapidly expanding addressable markets. The global e-commerce market is forecast to touch $4.5 trillion by 2024, according to an eMarketer report as the shift towards online shopping will continue to gain pace in the upcoming decade.
While Etsy has derived outsized gains since its IPO, it is significantly overvalued compared to ContextLogic. However, the latter is yet to turn profitable. Right now, it seems Esty’s upside potential is limited, given the above-mentioned factors. This suggests the lower valued ContextLogic makes it the better investment right now.
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ETSY shares were trading at $225.61 per share on Thursday morning, down $0.04 (-0.02%). Year-to-date, ETSY has gained 26.81%, versus a 4.50% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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