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Etsy: a Hand-crafted Commerce Site

etsyEtsy (NASDAQ: ETSY) operates an ecommerce marketplace, focused on handmade and vintage products and supplies, including clothing, jewelry, electronics, household goods, bath and beauty products, wine, do-it-yourself kits, and toys. Debunking the myth that successful ecommerce sites can be operated only from Silicon Valley or Seattle, Etsy’s operations are based in Brooklyn, one of the five boroughs of New York City. Consensus estimates call for revenue of $273 million in 2015, an increase of 39 percent over 2014, and a Loss per share of $0.69 in 2015, as compared to an operating loss of $15 million in 2014.

Etsy came public on the NASDAQ in an IPO priced at $16 per share on April 16, 2015 in a transaction led by investment banks Goldman Sachs, Morgan Stanley, Allen & Company, Loop Capital Markets, and The Williams Capital Group. Originally structured as a 16.7 million share IPO, the deal was expanded through the underwriter’s allotment to ultimately encompass 19.2 million shares, with 13.3 million shares sold by the company, and 5.8 million shares sold by existing shareholders, up from 3.33 million at the time the deal was priced. All told, the company raised nearly $200 million. Post-IPO the company has about $293 million in cash and no debt. At a recent share price of $13, Etsy’s market cap is roughly $1.5 billion.

Etsy is the most recent in a string of ecommerce IPOs over the last couple years, which include Zulily (NASDAQ: ZU), an ecommerce site focused on Moms, which came public in November of 2013, as well as Boston-based Wayfair (NYSE: W), an October 2014 IPO focused on home furnishings. Recognizing the growing percentage of consumer products purchased over the internet, and that not even Amazon.com can completely dominate web commerce, Etsy occupies a unique niche in online commerce, offering handcrafted, rather than mass produced products, including so-called vintage products, which must be 20 years of age or older.

Etsy’s revenue comes from listing fees from sellers on its sites, typically $0.20 per listing fee, as well as a 3.5 percent fee on the value of an item sold on the site. These fees account for about 55 percent of revenue. In addition, Etsy collects seller services fees, consisting of promoted listings, direct checkout fees, shipping labels, and wholesale fees. Together these comprise nearly all of the remainder. Like eBay, Etsy does not hold inventory or sell goods, an important selling point for sellers concerned that Etsy might compete with them. As of the end of 2014, Etsy claimed over 19.8 million active buyers, and 1.4 million sellers.

To learn where Etsy trades relative to its Internet IPO peers of the last seven years, please contact Battle Road Research for additional information.

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GoDaddy: Web Domain Guru

gd_rebrand_ogGoDaddy (NYSE: GDDY), based in Scottsdale, AZ, provides internet services including website creation and hosting, internet domain registration, and software applications such as email marketing to businesses and consumers. Consensus estimates call for revenue of $1.6 billion in 2015, which implies 15 percent growth over 2014, and EPS of $0.97 in 2015. By way of contrast the company recorded a seven percent operating margin in 2014, exclusive of depreciation, amortization, and stock-based compensation.

GoDaddy came public on the New York Stock Exchange on April 1, 2015 in a 26 million share IPO priced at $20 per share, in which the company netted roughly $500 million. Importantly, all proceeds from the IPO went to GoDaddy, which placed a priority on reducing its more than $1 billion debt load at the time of the transaction. Post-IPO, GDDY has roughly $243 million in cash and $850 million in total debt. GoDaddy’s IPO was led by an army of investment banks, both large and small, which included Morgan Stanley, J.P. Morgan Securities, Deutsche Bank, RBC Capital Markets, Citigroup, Stifel Nicolaus, KKR Capital, JMP Securities, as well as Oppenheimer and Piper Jaffray and Company. At a recent share price of $27, GoDaddy’s market cap is roughly $4.2 billion.

Founded in 1997, GoDaddy worked hard to develop a presence in website domain registration, largely in the shadow of Network Solutions, a company which VeriSign purchased in 2000 for $21 billion in stock, in a deal which redefined the definition of “goodwill.” VeriSign sold Network Solutions to Pivotal Private Equity for just $100 million three years later. Network Solutions and GoDaddy had the good fortune of having been one of only one of a few Internet registrars accredited by ICANN, a non-profit group that monitors and to some extent polices the registration of internet domains, under the auspices of governments around the world. GoDaddy’s aggressive advertising and pricing, enabled it to gain market and mind share in the registrar market, which has not been blunted, as far as we can tell, by Web.com (NASDAQ: WWWW), through its purchase of Network Solutions for $560 million in 2011. GDDY currently has over 60 million internet domain names under registration, which make it the largest accredited registrar in the world.

GoDaddy explored the idea of an IPO with Lehman Brothers in 2006 and went as far as filing an S-1 before cancelling the deal. In 2011 the company sold a 65 percent stake to a group of private equity investors, which include KKR and Silver Lake Partners. At the time, the transaction was thought to value GoDaddy at roughly $2 billion.

GoDaddy benefits from a diversified business mix, including web domains, which account for about 53 percent of sales, and are growing by 10 percent; website hosting and presence, 37 percent of sales, and growing in excess of 15 percent, and business applications, including email marketing, which account for 10 percent of sales and are growing faster than 15 percent per year. GoDaddy continues to make numerous acquisitions which requires patience to ascertain its organic growth rate.

We note that the company currently operates at a roughly 64 percent gross margin (exclusive of depreciation expense), and a six percent operating margin, exclusive of SBC. We consider these margins sub-par relative to other internet services providers, and would be reluctant to recommend the stock in the absence of some understanding of how the company intends to improve its operating margins. We note that KKR (which was involved in the IPO), as well as SilverLake Ventures, and Technology Crossover Ventures control a combined stake exceeding 50 percent, post-IPO, and we would be surprised were there not a secondary offering down the road.

To see how GoDaddy screens against a comparable group of over 40 Internet IPOs of the last seven years, please contact Battle Road Research.