Covid e-commerce rally pressures Etsy and Wayfair to show investors they have long-term durability

Published Mon, Nov 2 20201:32 PM EST

For online retailers Etsy and Wayfair , 2020 got off to an ugly start. Wayfair cut 3% of its workforce , or about 500 jobs, in February because of mounting losses. By mid-March the stock was down over 70% for the year. In early April, Etsy withdrew its guidance for 2020 after business dipped due to the coronavirus. Their fortunes changed quickly and dramatically. Both sites became havens for consumers trying to weather the pandemic, resulting in two straight quarters of triple-digit revenue growth at Etsy and Wayfair's fastest expansion since going public in 2014. Now, both stocks are up over 180% for the year, including gains of more than 2% on Monday, topping Amazon's 61% rise. Wayfair's market cap has topped $24 billion, and Etsy is now worth almost $16 billion. But these companies aren't Amazon, a $1.5 trillion behemoth that's proved it can generate investor returns regardless of economic conditions. Etsy and Wayfair are thriving today amid mass store closures and a rapid shift in consumer spending away from travel and towards material items for their home and their health. Some of that spending was driven by government stimulus checks that have ended and, depending on what happens in Tuesday's elections, may or may not come back. Heading into the holiday season, the pressure is on the e-retailers to prove they can keep luring back customers who would rather not buy everything on Amazon. Entering a wildly uncertain 2021, investors want to know if the companies can meet their elevated expectations in an up, down or flat economy. Wayfair reports on Tuesday Wayfair, which specializes in furniture and household goods, is set to report third-quarter results before trading begins on Tuesday. Analyst estimates have been steadily rising, and they now expect sales growth of 58% to $3.65 billion, according to Refinitiv. That's up from 35% growth in the same period a year earlier. Excluding some costs, Wayfair is expected to report a profit of 80 cents a share after losing $2.23 a share a year earlier. Etsy, an online marketplace that connects small retailers with buyers, updated investors last week with its third-quarter results . Sales soared 128%, quadruple its growth rate from a year earlier. It guided for fourth-quarter growth of 70% to 90%, up from 35% last year. CEO Josh Silverman told CNBC's Jim Cramer that the results the company is posting are a function of it becoming a recognized brand in e-commerce. "We're suddenly in the same breath as brands that are 50 or 100 times bigger than Etsy," Silverman said. "And we have the potential to be so much bigger than we are today. It's just being about top of mind." While Etsy and Wayfair are riding the same wave, their stories are very different. The early days of the pandemic for Etsy were all about masks. Recognizing the burgeoning demand for face coverings after the Centers for Disease Control recommended Americans wear them, Etsy began recruiting sellers who could make as many as possible. Whether it's for their favorite sports team, musical artist, political figure or just a stylish pattern, Etsy became the go-to site for consumers to keep safe and have some fun doing it. Masks accounted for 14% of Etsy's gross merchandise sales in the second quarter and 11% in the third. Combined, that's over $600 million worth of facemasks. Critical for Etsy's long-term growth is its ability to turn mask shoppers into repeat buyers of other items, while efficiently bringing in new customers through digital marketing campaigns. With net income up six-fold in the third quarter to $91.8 million, Etsy has the money to invest in expanding its customer base and it's putting that cash to use. Analysts at Stifel raised their price target to $170 from $160 last week, in part because 38% of people who bought masks in the second quarter returned in the third quarter for non-mask items. That "gives us greater conviction that improvements in engagement and conversion will drive durable growth long after the impact of the present health crisis subsides," they wrote. Rick Patel, an analyst at Needham, recommends buying Etsy shares but has a hold rating on Wayfair. His bullishness on Etsy stems from surveys showing that the site has hit the mainstream and that consumers view it as more than a place for homemade and craft goods. They're also going there for apparel and everyday accessories. Wayfair, on the other hand, remains tethered to the home, Patel said. The company has benefited from people investing in making their living space more comfortable, since it's been doubling as their office and kids' classroom for most of the year. "Etsy's opportunity is significantly larger now than it was pre-Covid because consumers are embracing it on a much larger scale," Patel said in an interview. For Wayfair, the prospect of consumers venturing out of the home more or of a vaccine hitting the market "would probably be a negative signal for the home category and Wayfair being one of the top companies in that space would be vulnerable," he said. D.A. Davidson's Tom Forte, who has the equivalent of a hold rating on Wayfair, wrote last week that one of the main issues facing the company is the expiration of the $600 weekly unemployment checks that Americans were receiving as part of the CARES Act and the fact that "the government has not been able to pass additional stimulus." What they can and can't control There's no change in sight. Democrats and Republicans in Congress have been at an impasse on a new bill, and Senate Majority Leader Mitch McConnell said on Friday that no new coronavirus aid package should be taken up until early next year. Wayfair is limited in its ability to influence Washington, but the company is doing what it can to take advantage of surging online traffic. For any e-commerce site, the cheapest way to get future sales is to make sure that existing customers want to come back. At the Goldman Sachs retailing conference, held virtually in September , Wayfair CEO Niraj Shah said "repeat continues to be the lifeblood of our business." Shah said at the time that returning customers make up a bigger portion of the company's business every quarter and now account for 70% of orders. That helps explain why Wayfair was able to increase revenue in the second quarter by 84% while ad costs rose just 61%. "It's a highly profitable new revenue stream," Shah said at the Goldman event. "The repeat is sort of the door opener to, frankly, grow our revenue per customer tremendously over time by taking share of wallet." Hovering over Etsy, Wayfair and every other online retailer is Amazon, where CEO Jeff Bezos has trained consumers that they can get whatever they want whenever they want it. Fast shipping, easy returns and user-friendly apps are table stakes to keep customers from taking their business somewhere else. They all require hefty investments. Amazon said last week that, in the fourth quarter alone, it will spend $4 billion just on Covid-related costs, like cleaning supplies and social distancing measures. That's more than Etsy and Wayfair combined recorded in operating costs for all of 2019. A Wayfair spokesperson declined to comment for this story, and Etsy representatives didn't respond to a request for comment.

An employee walks past a quilt displaying Etsy Inc. signage at the company's headquarters in the Brooklyn.

Victor J. Blue/Bloomberg via Getty Images

For online retailers Etsy and Wayfair, 2020 got off to an ugly start.

Wayfair cut 3% of its workforce, or about 500 jobs, in February because of mounting losses. By mid-March the stock was down over 70% for the year. In early April, Etsy withdrew its guidance for 2020 after business dipped due to the coronavirus.

Their fortunes changed quickly and dramatically. Both sites became havens for consumers trying to weather the pandemic, resulting in two straight quarters of triple-digit revenue growth at Etsy and Wayfair's fastest expansion since going public in 2014.

Now, both stocks are up over 180% for the year, including gains of more than 2% on Monday, topping Amazon's 61% rise. Wayfair's market cap has topped $24 billion, and Etsy is now worth almost $16 billion.

Wayfair, Etsy and Amazon this year

CNBC

But these companies aren't Amazon, a $1.5 trillion behemoth that's proved it can generate investor returns regardless of economic conditions.