Noland Langford on Etsy: Growing Online Presence

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. Today we're digging in on a popular growth stock that has benefited from the pandemic but that appears poised to keep going. Joining me now, it's Nolan Langford, Chief Executive at Left Brain Investment Research. You can learn more about the firm and its research at leftbrainir.com and on Twitter @leftbrainir. Nolan Langford, what stocks on your mind, and perhaps more importantly, what stocks on the left side of your brain today?

Hey Chuck, very excited to welcome in our listeners today, and I am very excited to introduce to our audience and our guests a stock we've been following for a while. The name is Etsy, one of the largest e-commerce platforms for unique handcrafted and personalized products.

It's ticker symbol ETSY. And it's maybe the ultimate pandemic stock because one of the things that happened is that all the sellers on Etsy, when the pandemic started, this is where you'd go when you're like, I need a cool mask. I need something that's a little bit different. It was like everybody who was in their basement because they couldn't go out anyplace, who was sewing masks because they had nothing else to do, was selling them on Etsy. But it's about a lot more than that pandemic story. I mean, the pandemic kind of gave this stock a boost, but why is this stock gonna keep going once people are saying, hey, I'm vaccinated, I can go out to the mall? Why are they still gonna keep going and fueling Etsy?

That's a really good question. I think that would be the initial way to just shrug Etsy off. As sort of a COVID stay-at-home play. And for the listeners, just so we're clear, Etsy— what people have come to Etsy for, it's built a strong brand name over the years primarily because of this niche focus into this retail, handcrafted, personalized goods sector. And just like you mentioned, Chuck, that's how they started life. And most people still think about some lady doing a specialized quilt or maybe some gentleman doing some hand-carved whatnot. And that's how Etsy started, but they have evolved since then. And now it's a leading marketplace for all sorts of goods and services and sort of like Amazon when they first started, you know, people don't remember Amazon started as a bookseller and now they sell everything. And the last thing you think about with Amazon is books. Etsy, we think, is going to evolve in a similar way where they're starting with these handmade artisan unique goods, but they are stepping up in a lot of categories, particularly the home and retail. So they're on the move.

This is a company that, well, if you're looking at relatively recent history, it rode down the market when the market was suffering as we got into the pandemic, but it has been strongly upward ever since. As the market was bottoming in March of last year, Etsy was trading at around $30, $31, $32 a share. Now it's over $200 a share. That kind of growth worries some investors, but we know at Left Brain it doesn't worry you. Why not? I mean, why aren't you worried that if you get in now you're getting on late in this ride?

Well, we look more at what is happening beneath the price, or should I say besides the price. When we look under the hood, we like what we see. You know, Etsy has a large selection of not only sellers but buyers. They are developing brand awareness that only increased during the pandemic. But Etsy has some things we like. One is a very large database of buyers. Unique buyers and unique sellers. And this habitual buyer base was the fastest growing segment in the last quarter, growing over 150% a year. And the reason that we like this cohort, and it's really important, is because of the strong network effects. These buyers and the sellers with their own networks— buyers come because that's where sellers are, and sellers come because that's where buyers are. Then you get this network effect between the buyers and sellers and all of these ancillary services that Etsy really is just starting to tap. If you look at some of the bigger e-commerce platforms, eBay comes to mind, MercadoLibre, they have many more ways to monetize their buyers and sellers. Etsy is really just getting started along that path.

You made a comparison in terms of the business with Amazon. But I don't know that that's truly a fair comparison for what you could expect Etsy to grow into. This is an interesting first response from the market, like Etsy being the, hey, you can be the knitter who's working at home or whatever, and you can have done super well and come onto Etsy and do all of that. Well, it seems to have that, that kind of first in the space thing. But eBay was first in the space, and eBay, which had some great growth for a while, seems to have struggled a lot more. It's been on the rise a lot recently, but what's an appropriate comparison for somebody who's going, okay, I want to know where Etsy shakes out in this really weird retail market that we're in where we don't like real stores, we like online, and yet there's pent-up demand and people want to get out to stores. What's the appropriate comparison for an Etsy?

So if you think about Etsy, they enable small businesses to modify their productivity, whether that be crafts or anything else. And the ultimate small business is somebody that works from home, where maybe before it was that person selling something at a weekend flea market in their general area. Now that person's audience for their high-quality craft handmade wares is the entire globe. This is very, very powerful. If we're looking for some sort of corollary, the first company that comes to my mind, which also may not be a household name for listeners, is Shopify. Shopify is, in my mind, similarly situated as a platform. Etsy's not necessarily a head-to-head competitor with Shopify, because Shopify is more for retailers and high volumes, where Etsy is more for artisan handmade items and the opposite of mass market. But from a serving small businesses and empowering entrepreneurs, expanding their reach, using technology to decrease geographical barriers, I would say Shopify would be a good corollary.

Shopify is the corollary. Obviously, when you're looking at Etsy, whenever you identify a growth stock, we're always saying you're expecting it to double in fairly short order. I guess what we're really saying is that in your research system, the green light is fully on for Etsy, correct?

Yes. I mean, we like this business. Absolutely. The enterprise value here is about $25 billion, so it's firmly into large cap. Territory, so you expect price movements to be— I don't want to say predictable, but unlike small company stocks with real small market caps that aren't in any indexes, you tend to get stomach-churning volatility that most people won't accept. Here you have a business big enough at $25 billion that you would expect normal market movements. You also have a profitable business, you know, you have free cash flow here of over $600 million last year. And what we really like, you know, if you take a look at the margins, they're high at +70% and growing. And you have a company that's growing revenues at 25%, but here on a price-to-sales basis, we're paying 10 times. A long way of saying, you're right, Chuck, this is a name we like. It's on our green light list. And for our subscribers, it's a name that we're highlighting. We like this business and its business model a lot.

Nolan, always great to talk with you. Thanks so much.

Have a wonderful week. And to our listeners, keep tuning in and pointing your browsers to leftbrainir.com.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations but are designed to engage your brain. Please do your diligence before making any financial transactions. I'm your host, Chuck Jaffe, and you can learn more about my weekday podcast at moneylifeshow.com. Thanks to my guest, Nolan Langford, Chief Executive at Left Brain Investment Research. He mentioned the website leftbrainir.com, and if you missed their Zoom event last week on Wealth Builders, well, you can go to the website and still arrange to get a look at it now. By the way, they're on Twitter @leftbrainir. Left brain thinking is is available every Wednesday. We hope you'll subscribe via your favorite podcast app and that you'll plan to put your left brain thinking cap on every week. Until next Wednesday, please stay safe.