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What will buying Depop mean for Etsy’s share price?

Etsy’s [ETSY] share price has struggled so far this year, with investors generally not sold on the online craft retailer’s prospects. The stock has fallen 2.78% in the year to date, after closing at $167.30 on 9 June.

Despite rapid gains that saw Etsy’s share price rise 42.13% to $244.58 by 1 March, the stock saw a dramatic drop off, closing 22.2% down at $190.26 a week later.

Throughout April, Etsy’s share price held steady, but then saw another sudden drop of 14.6% on 6 May. Etsy’s share price has been unable to regain momentum since.

As of its 9 June close, Etsy’s share price was 6.1% above the six-month low it hit a month prior, even after a short-lived rally that saw the stock gain 7.1% on 2 June, following the announcement that the handmade goods seller had made a major purchase of its own.


Valuation of sale of Depop


Etsy chases Gen-Z

Etsy announced on 2 June that it bought the British second-hand clothing app Depop for $1.6bn.

Depop has a community of over 26 million registered users in more than 147 countries. Two million of these are active sellers, and between them generated second-hand clothing sales of $650m in 2020, of which Depop took a $70m cut. This figure is double that of the previous year.

The deal values Depop at approximately 23.2x its 2020 revenue. According to the company’s website, the community has made $1bn to date, implying it could be some time before Depop’s revenues equal that of the deal’s valuation.

The principal motivation behind Etsy’s purchase appears to be gaining access to a younger audience. More than 90% of Depop’s users are under the age of 26, making them Generation Z. Etsy’s current user base is predominantly Millennials or older, as the median age of Etsy sellers is around 39.

“The resale market in general is a massive market that we think is well-positioned for growth well into the future.” He added: “We think Gen Z is the most exciting community within resale,” Josh Silverman, CEO of Etsy, said of the acquisition.

“The resale market in general is a massive market that we think is well-positioned for growth well into the future. We think Gen Z is the most exciting community within resale” - Josh Silverman, CEO of Etsy

With this younger demographic in mind, Depop has always offered an outlet for consumers searching for more ethical and sustainable clothes retailers. It has partnered in the past with the likes of Adidas [ADS.DE] and Ralph Lauren [RL] as the fashion industry attempts to improve its green credentials.

Depop’s existing offices and management team will remain in place. Founder Simon Beckerman stands to pocket £45m thanks to the sale, according to The Guardian.


Is e-commerce a buy?

Market commentators have generally responded positively to the move. Jefferies analyst John Colantuoni reiterated his buy rating for the stock on 2 June, setting a price target of $260.

Ark Invest signalled its approval by adding 157,181 Etsy shares to the ARK Next Generation Internet ETF [ARKW]. The ETF’s total Etsy stake is 157,379 shares as of 8 June, making Etsy the fund’s 44th largest holding (out of 48) at 0.48% of the fund. The ARK Next Generation Internet ETF has fallen 5.1% so far this year, despite gains of 74.5% over the last 12 months.

Other ETFs holding Etsy include the ProShares Online Retail ETF [ONLN], which has Etsy in its top 10 holdings as of 8 June at 3.3% of the fund’s value, and the Amplify Online Retail ETF [IBUY], of which Etsy is the fund’s 26th largest holding with a 1.73% weighting as of 8 June.


Returns rise of the Amplify Online Retail ETF since June 2020


Off the back of the stay-at-home orders issued in response to the coronavirus pandemic lockdowns, these e-commerce focused ETFs have enjoyed a strong 12 months, with the ProShares Online Retail ETF gaining 57.9% since June 2020 and the Amplify Online Retail ETF up 80.7% over the same period.

However, with recoveries beginning to settle, both have seen their performance dip in 2021, with the ProShares Online Retail ETF gaining just 3.6% so far in 2021 and the Amplify Online Retail ETF only slightly ahead with gains of 8.9% since January.

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