This e-commerce business is a cash flow machine
Not all businesses are created equal. Even among those with a competitive advantage, some companies have better financial profiles, which allows them to generate more cash than others. And as long-term investors, that’s exactly what we need to be looking for.
The market for homemade and unique products Etsy (NASDAQ: ETSY) is one of those companies. Over the past 12 months, it has generated $ 584 million in free movement of capital on $ 2.2 billion in sales, for a margin of 26.6%. It really is an exceptional cash flow margin, and it helps explain why the stock was such a winner.
Let’s break down why this booming e-commerce business is such an efficient cash cow.
Image source: Getty Images.
Minimum capital requirements
At a high level, Etsy is a platform business. He doesn’t own any of the goods that sellers offer to buyers, so there is no need to spend money on inventory. Etsy only makes transactions easier and collects a fee based on the amount of gross merchandise sales (GMS) that take place on its site. In the last quarter, Etsy reported revenue of $ 532 million, based on just over 3.1 billion GMS.
The technological infrastructure and software necessary for the operation of the Etsy marketplace are already in place thanks to the capital investments made over the years. Therefore, as the business increases its sales, Etsy is able to leverage its marketing, product development, and general and administrative fixed costs on a larger revenue basis. A large portion of each additional transaction goes to the bottom line, so management’s primary focus, unsurprisingly, should be to continue to grow GMS.
In 2015, Etsy operating margin was 0.6% and the company recorded a net loss of $ 54.1 million for the full year. Five years later, in 2020, the operating margin increased to 24.7% and Etsy had a net profit margin of 20.2%. As annual revenue rose from $ 274 million to $ 1.7 billion over the same period, profitability soared, demonstrating the significant scalability of Etsy’s business model.
Where is the money going?
In addition to letting cash reserves build up on the balance sheet, there are four main things businesses can do with their free cash flow. These include paying dividends, buying back stocks, buying other companies, and reducing any outstanding debt.
Historically, Etsy has focused on stock buybacks and the occasional acquisition as uses of cash. In the past 12 months, the company has repurchased $ 409 million worth of shares. This figure has increased every year since the start of the buybacks in 2016.
And to support CEO Josh Silverman’s ambition to create a âHouse of Brands,â Etsy pursued a smart acquisition strategy to expand into adjacent markets. In 2019, Etsy bought Reverb, an online marketplace for musical instruments, for $ 275 million in cash. This year alone, Etsy bought second-hand fashion retailer Depop for $ 1.6 billion and Elo7, known as Etsy of Brazil, for $ 217 million. Both deals were made with cash in hand. This pocket money can certainly come in handy sometimes.
Like investors, management should direct their capital toward what they believe are the most profitable opportunities at any given time. In Etsy’s case, this involved buying back its own shares and sometimes other companies. Ultimately, it’s about growing the intrinsic value of the business over time.
Etsy has turned out to be a fantastic cash flow machine. As it continues to gain momentum, shareholders should also expect more cash profits.
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Neil Patel owns shares of Etsy. The Motley Fool owns stock and recommends Etsy. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.