Leffert said if Etsy's relative lack of profitability isn't as big a concern as with other tech IPOs, the company's margins place its story in a more negative light. While people may compare Etsy to eBay as far as the structure of the company, Leffert compared it to GrubHub, and unfavorably, in terms of margins generated on sales. "GrubHub has much higher margins with similar sales and a similar growth rate," he said.
Over time, Etsy thinks it will get more of that investment back in higher sales, and it will be able to scale back its spending as the company gets bigger. Long-term plans call for Etsy to trim marketing spending to 16 percent of revenue, from 20 percent last year, and product development spending will also moderate. That will let margins reach their long-term targets, Salen said.
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The deal values Etsy at close to 9 times last year's $196 million in sales and roughly 7.5 times this year's sales, assuming a conservative assumption that it grows 20 percent, according to Renaissance Capital. That's less than what social media companies with wider profit margins attract, but twice as much as the more mature eBay, which, like Etsy, is a global platform for private sellers that also offers payment services and other extras.
Leffert said the valuation isn't overdone. "Their gross merchandise sales are still growing fast," he said, explaining that the company earned $23.1 million in earnings before interest, taxes and non-cash charges last year. "They have some room to grow, because it hasn't slowed down much yet,'' he said.
IPOfinancial.com's Menlow thinks the valuation reflects a financial picture that won't develop for another two to three years. "That is evidently comfortable for many investors who don't think the deal is out of line,'' he said.