Why Every Investor Should be Cheering Etsy's Good Earnings

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There are many things that we can learn from Etsy's (ETSY) earnings that were released after yesterday’s market close, but perhaps the two most important are that some strategies and ideas that have until recently stood the test of time are rendered pretty much useless in the modern economy, and that we should all be cheering the company on.

There is an old investor’s saying that you should only invest in what you know and like. The theory is that if you see the utility in a product and service and buy or use it yourself, others will do the same, and the company responsible for it will therefore be a success. If, on the other hand, you have no interest in something and cannot see its appeal for others, you should avoid it.

For me, Etsy originally fell into the second category. What was once again clear last night, however, was that that was a product of my own ignorance and bias, not any rational analysis of the company’s business.

I can think of very little that would be worse than being stuck at a giant arts and crafts fair, which is how I saw Etsy at first. A quick visit to their website reinforces that view to some extent, but it misses the most important function of the company, and the one that should have us all cheering the site’s success: Etsy is, in effect, one of the most effective empowerment tools for small business ever created.

Not only does Etsy provide an effective outlet for small company’s products, both in the U.S. and internationally, but it also does so while still allowing those businesses to retain pricing power. That is a rare and important trait in e-commerce. One of the biggest criticisms of other internet retail outlets is that they do the opposite of that; that they squeeze margins for small businesses in order to take a cut for themselves and remain competitive.

Etsy, by charging a flat rate per item sold, allows sellers to charge what they think is appropriate, and allows the market to decide if they are right.

Nor is pricing power the only benefit the platform offers to small businesses. They also offer tools such as payment processing, cheap and easy shipping labels and, most significantly, education to foster success. Recently their focus has been on helping sellers to achieve efficiency in order processing so that entrepreneurs can compete in a world where Amazon's (AMZN) Prime service has led consumers to expect rapid receipt of ordered goods.

It is really not hyperbolic to sat that that kind of thing is good for entrepreneurs and capitalism in general and, by extension, good for America.

As you can see from the chart above though, it is also good for Etsy’s stockholders. The stock has roughly tripled over the last year, a period during which the S&P 500 has been essentially flat. Go back a little further, to early in 2016, and ETSY was trading at just a little over $6, just over one-tenth of its current price.

That kind of growth is hard to maintain, yet the Q4 numbers showed that Etsy is continuing to grow at around a forty percent clip. The secret to that success is loyalty, both from customers and from the sellers who are the lifeblood of the company.

E-commerce can be blamed or lauded for a lot of things, but one of its most significant, if often overlooked traits, is that it has changed the definition of the term “niche market.” When you can access hundreds of millions, if not billions of potential buyers, no market is too small to support a successful business. “Niche” no longer means small and static.

It is possible to look at Etsy and make a case that the stock has a valuation problem. It has a P/E that is nudging triple digits, but that has been the case through most of the climb evidenced by the chart. The fact is that operating from a dominant position in a growing market makes conventional valuation metrics null and void. What matters in that situation is the vision of the management team and their ability to execute, and on that front, Etsy is doing just fine.

The law of large numbers as it relates to the market will make it hard for ETSY to triple again over the next year, but when you understand what they do beyond selling artsy-crafty things, it becomes hard to bet against them doing just that. Even if you find your biases and the valuation argument insurmountable though, if you support capitalism and entrepreneurship, which most investors presumably do, you should still be rooting wholeheartedly for Etsy’s continued success.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Earnings , Small Business , Stocks , US Markets
Referenced Symbols: ETSY

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