Can Etsy Satisfy Shareholders as a B Corp?
As one of the first B Corps to IPO, can Etsy strike a balance between its fiduciary duty and its social pledge?
Etsy (NASDAQ: ETSY) is an online marketplace that allows individuals across the globe to buy and sell unique goods with the stated mission: “to reimagine commerce in ways that build a more fulfilling and lasting world.” Etsy seeks to fulfill this mission not only through the products it sells on the platform, but also through investment in its community of buyers and sellers, and the environment. This dedication aligns with B Corp methodology of maximizing all stakeholder value, not just shareholder value.
These values resonate with Etsy’s customers, which has resulted in phenomenal growth for the company. Since its inception in 2005, Etsy’s global marketplace has ballooned to 27 million buyers and nearly 2 million sellers that drive $2.4 billion in gross merchandise sales. These impressive growth metrics have attracted the attention of prominent Venture Capital investors, which have invested $266 million over Etsy’s lifetime. The momentum has ultimately enabled Etsy to go public, which it did in 2015 with a valuation of $1.78 billion. It was one of the first prominent B Corps to go public.
Since its IPO, however, Etsy’s stock has had a tumultuous ride; immediately after trading commenced at $16 per share, the price skyrocketed to roughly $30 per share. Since then, the stock has lost significant value, hitting an all-time low of $6.04 in February 2016. Today, the share price is $12.60 (as of January 19, 2017), but has been unable to recover to its original offering price.
Is Etsy’s commitment to its B Corp values responsible for this poor performance in the public markets or can the company overcome this initial bout of Wall Street skepticism while maintaining its commitments?
To answer this, it’s important to understand public investors’ expectations. While every investor varies in their methods and considerations when purchasing stock, there are basic underlying theories that the vast majority of investors believe. The most basic and widely accepted theory is: a company’s current value is the present value of all future cash flows. In English, this says that the value of a company today reflects all the money available to shareholders in the future. This has two important implications.
First, healthy cash flows are incredibly important to investors. Cash flows are influenced by two factors: topline revenue the company makes and the costs it incurs to operate. Revenue minus costs is cash remaining. Given this, companies can improve their cash flows in one of three ways: growing topline revenue, decreasing operating expenses, or a combination of the two.
Second, the fundamental valuation of a company is almost completely informed by future projections. This creates an equation that’s inherently prone to volatility over time because projections are almost always wrong. Unpredicted events can cause expectations to differ drastically from reality, which causes investors to reevaluate their projections to incorporate new information. This volatility is particularly present for young companies, who tend to experience more turbulence as they grow.
In evaluating Etsy with these two considerations in mind, there are a few trends that are important to notice. The first is that the company has experienced a rapid topline revenue growth over the past three years; growing 56.4% from 2013 to 2014 and 40% from 2014 to 2015. This is a great start for healthy cash flows, but unfortunately the company has also experienced increasing costs.
In examining the company’s costs, it becomes clear that operating costs are the largest overall category and they have increased as a percentage of sales over the last three years. Digging deeper, virtually all of the outpaced spending on operations has been driven by larger marketing spend, which is entirely unconnected with Etsy’s B Corp commitments.
In fact, management has made clear that their primary goal is increasing the Etsy user base. They’ve found that for every individual they get on the platform, nearly one third of sellers and over 44% of buyers remain active for more than four years. The buyers are especially attractive because they have a high propensity to purchase repeatedly; nearly 81% of Etsy’s gross merchandise sales are driven by repeat customers.
If these metrics continue to hold, a successful marketing push now will lead to a drastic increase in active users. Those users will in turn drive significant revenue — and ultimately larger cash flows — for Etsy for a prolonged period of time, all without compromising commitments to all Etsy stakeholders.
Despite all that, investors may still argue that Etsy’s commitment to all its stakeholders will unnecessarily add costs and limit the company’s profits. This could be the case, but it seems unlikely. Ultimately, Etsy’s success depends on its community of buyers and sellers. Its buyers are labeled “thoughtful consumers.” They care more for authenticity and sustainability than price and convenience. They want to know how and where items were made, and who made them. Etsy is aware of this and goes to great length to ensure a diverse community of sellers; 86% are women and 76% of them consider their Etsy store to be a meaningful business. This precise growth of and investment in the community is directly attributed to its B Corp commitments, as outlined in the company’s impact report.
Ultimately, Etsy’s success depends on its community of buyers and sellers. Its buyers are labeled “thoughtful consumers.”
If Etsy were to forego these commitments, it would erode its own differentiation, which it has proven is highly valuable to consumers. Its diverse community, sustainable practices, and authenticity would be lost for a profit-maximizing, mass-produced and homogenized marketplace, which would turn its devoted customer base away and, in doing so, drain the very lifeblood of the business. No amount of financial analysis could ever bring it back.
Sources:
B Lab (https://www.bcorporation.net/community/etsy)
Bloomberg Markets: (https://www.bloomberg.com/quote/ETSY:US)
Etsy.com (https://www.etsy.com)
Etsy 2015 Annual Report: form 10-K (http://investors.etsy.com/phoenix.zhtml?c=253952&p=irol-sec)
