While smaller businesses have largely struggled this year, large-scale transaction providers such as Etsy and Shopify have seen their revenues soar, WSJ reports.
Why It Matters: The pandemic has dramatically accelerated the world’s shift to e-commerce, and Etsy and Shopify have already started to reap those rewards. Although the small businesses they provide for have faced financial concerns, Etsy has seen its share price more than quadruple, and Shopify has roughly tripled. And even at these prices, analysts think there’s room for them to grow further.
A Big Picture Look: Shopify is trading at roughly 350 times forward earnings, while Etsy is about 90 times. In contrast, Amazon and Apple trade at roughly 70 times and 35 times forward earnings, respectively.
What the generous valuations at Etsy and Shopify show are that “sales growth will continue at a brisk pace and that some consumer behaviors that changed during the Covid-19 pandemic will endure.”
- Investors are also quick to buy up shares of any rising tech firm.
Both sites have “served as a lifeline [for many small-business owners], as their companies shift to a focus on online sales. And they’ve kept pricing competitive.
- Etsy charges 20 cents per listed item and a 5% transaction fee on sales.
- Shopify’s basic plan charges $29 per month for sellers, with a 2.9% transaction fee.
The Takeaway: The question is whether “the pandemic will cool online shopping habits.” Roughly 11% of Etsy’s overall gross-merchandise sales in Q3 were masks, which will likely go away when Covid-19 is no longer a concern. But analysts remain excited about Etsy and Shopify, and e-commerce has a good case to keep snowballing in the first half of 2021 as people wait out vaccine distribution.
Shopify ($SHOP) has to be the most ridiculously priced large stock I know of. Even if they keep up their pandemic-boosted 80% year-over-year growth throughout 2021, which I see as difficult, they are trading at 53x forward Gross Profit.
That’s the same valuation as some of the fastest-growing, highest-quality enterprise software stocks like $CRWD that have a stronger outlook towards continued 80% growth.
Etsy ($ETSY) analyst projections assume that its growth rate slows down to the mid-teens in 2021. On these assumptions, $ETSY is trading at 18.7x forward Gross Profit.
If Etsy can capitalize on their recent growth and continue 50-100% growth rates in 2021 (in addition to the elevated 2020 numbers), this stock could do pretty well. But given 11% of their sales have been facemasks and the uncertainty around what happens to fringe e-commerce once the pandemic subsides, we’re on the sidelines for this one.