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Billion Dollar Unicorns: Etsy Continues to Fumble

Posted on Thursday, Aug 13th 2015

I have repeatedly spoken about Billion Dollar Unicorns who have entered the club due to the frenzied investments by VCs who partake in initial funding rounds at spectacular valuations. Some of these companies are not able to address the expectation of a public company and implode when listed on the stock exchanges. One such instance is that of niche e-commerce player Etsy (NASDAQ: ETSY), which appears to be stuck in a bit of a rut. Recent disappointing quarterly results accompanied with continuing absence of profits had sent the stock tumbling to below list price levels. As competition in the niche space increases, Etsy will have tougher battles to fight in the next few months.

Etsy’s Financials

Etsy’s second quarter revenues grew 44.5% over the year to $61.4 million, beating market expectations of $59.5 million. But the loss of $0.07 per share was higher than the Street’s forecast of a loss of $0.06 per share. Gross Merchandise Value (GMV) of goods sold on Etsy grew 24.6% over the year but it was hurt by currency movement. On a constant currency basis, GMV would have increased 26.5% over the year. Etsy expects the currency movement to continue to impact their revenues and profitability in the current quarter.

Etsy’s rising costs are particularly worrying. During the quarter, operating expenses grew 49% over the year to $43.2 million. The increased spend was on account of higher marketing spend. Etsy is expected to continue to spend more on marketing to drive growth. They are also looking to add more headcount to meet the needs of their growing business.

Among key operating metrics, Etsy ended the quarter with 1.5 million active sellers compared with 1.4 million a quarter ago and 21.7 million active buyers, compared with 20.8 million at the end of the previous quarter.

Etsy’s Initiatives

Etsy has been working on improving their offerings by focusing on four key areas: making Etsy an everyday experience, building local marketplaces globally, offering high-impact seller services, and expanding the Etsy economy. To transform Etsy into an everyday experience, they are leveraging the mobile trend. At the end of the previous quarter, their mobile app had recorded over 28 million downloads compared with 25 million downloads at the end of the March quarter. They are improving the mobile experience by creating a seamless environment for both buyers and sellers and are also improving their search capabilities across both the desktop and mobile sites. They recently released an exploratory search feature that makes search results, navigation and browsing more intuitive to buyers by allowing them to browse by category, feature, or product type.

To help build local marketplaces globally, they are investing in international growth. During the quarter, 30% of their gross sales were from international markets. They are increasing their presence in markets like the UK where they are able to attract local buyers and sellers on their platform.

Etsy is increasing the portfolio of services available to sellers on their platform. Currently, they provide promoted listing, direct checkout, and shipping labels as paid services to sellers. They are not only looking to release these services to international markets, but are also adding to these services. For instance, they are adding enhancements such as search term analytics to promoted listings that let sellers identify the search words that led the buyer to visit their site. They are also providing sellers with the search terms that generate higher clicks and orders than average.

Finally, in terms of expanding the Etsy economy, they recently tied up with Lionsgate to launch a pilot program that will allow sellers to create and sell licensed items based on the Divergent series Insurgent movie.

But all their moves appear to be a case of too little, too late. Etsy has been in the industry for over a decade and could have had a superior first mover advantage. But, it seems to be losing that ground quickly to the might of Amazon. Amazon’s Handmade site has made quite an impression on Etsy’s sellers who are able to get the benefit of being a part of Amazon Prime and have access to more than 250 million customers worldwide. Sellers are also able to earn additional revenues through Amazon by signing up for their Associates program that helps earn as much as 10% in advertising fees on purchases made for qualifying products from their sites. Finally, sellers seem to be lured by Amazon’s commitment to handmade products. Amazon classifies a product as handmade if it is made entirely by hand, hand-altered, or hand assembled. Etsy had similar strict definitions till two years ago when they redefined handmade to allow for production by manufacturing partners. Most sellers have been peeved by this change as it allows for people to sell products that have been bought from low cost countries such as China and India.

The stock market is also not too happy with Etsy. Last week, their stock had hit a low of $13. 44. Their stock is currently trading around $16.88 with a market capitalization of $1.89 billion. The stock had listed on the exchange at $16 a share with a valuation of $1.8 billion. Soon after listing, the stock touched a high of $35.74, taking its market capitalization to $3.5 billion.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. Unicorns will also be discussed with some special guests during our 1M/1M Roundtable programs over the next few weeks. To be a part of the conversation, please register here. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

 

This segment is a part in the series : Billion Dollar Unicorns


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[…] Billion Dollar Unicorns: Etsy Continues to Fumble […]

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