Morningstar Report-636d1778e26a17cb57991bbf

Morningstar Equity Analyst Report | Report as of 6 Nov 2023 01:16, UTC | Reporting Currency: USD | Trading Currency: USD
| Exchange: NASDAQ - ALL MARKETS Page 1 of 24
Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC
Last Price Fair Value Estimate Price/FVE Market Cap Economic MoatTM Equity Style Box Uncertainty Capital Allocation ESG Risk Rating Assessment1
65.25 USD 145.00 USD 0.45 7.81 USD Bil Wide 6 Mid Growth Very High Standard ;;;;;
3 Nov 2023 22 Aug 2023 20:45, UTC 3 Nov 2023 1 Nov 2023 05:00, UTC
Price vs. Fair Value
Fair Value: 145.00

22 Aug 2023 20:45, UTC
400
Last Close: 65.25
300 Over Valued
Under Valued
200
100
0
2018 2019 2020 2021 2022 YTD
Analysis
— — — 0.99 0.70 0.45 Price/Fair Value
132.62 -6.87 301.60 23.06 -45.29 -45.53 Total Return %
Morningstar Rating
Total Return % as of 3 Nov 2023. Last Close as of 3 Nov 2023. Fair Value as of 22 Aug 2023 20:45, UTC.
Contents
Business Description Etsy Should Emerge Stronger as Cyclical Pressures Abate;
Business Strategy & Outlook (6 Nov 2023)
Bulls Say / Bears Say (6 Nov 2023) Wide Moat Continues to Look Intact
Economic Moat (5 Nov 2023)
Fair Value and Profit Drivers (5 Nov 2023)
Business Strategy & Outlook Sean Dunlop, CFA, Equity Analyst, 6 Nov 2023
Risk and Uncertainty (5 Nov 2023)
Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a
Capital Allocation (5 Nov 2023)
Analyst Notes Archive variety of heterogeneous verticals in the long tail of unbranded products. The firm’s marketplace
Financials properties—Etsy, Reverb, and Depop—all target non-commoditized inventories (artisanal crafts, used
ESG Risk musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer
Appendix
sales, and strive to create a “treasure hunt” experience around a unique, customizable, and
Research Methodology for Valuing Companies
consequently less price elastic product suite. The firm's core "Etsy" marketplace accounts for roughly
Important Disclosure
90% of consolidated gross merchandise volume, or GMV.
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and
Investment Research Policy. For information regarding conflicts of interest, please We view Etsy’s competitive strategy as sound, with the quickly growing firm capitalizing on a surge of
visit: http://global.morningstar.com/equitydisclosures.
COVID-19-induced demand, providing one of only a handful of outlets through which customers could
The primary analyst covering this company does not own its stock.
purchase face masks during the nadir of the pandemic. Though mask sales have dwindled, the platform
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1
Rating. has remained sticky, with Etsy seeing its consolidated active buyer base swell to 95 million at the end of
2022, roughly level with 2021 figures and more than double the firm's prepandemic figure. As the
marketplace leans into brand marketing to increase its unprompted awareness, invests in platform
search functionality and filtering, and reduces purchase friction with its buyer protection program and
better platform policing, we see a viable route to mid-single-digit growth in average annual per buyer
spend over the decade to come.
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Morningstar Equity Analyst Report | Report as of 6 Nov 2023 01:16, UTC | Reporting Currency: USD | Trading Currency: USD | Exchange: NASDAQ - ALL MARKETS Page 2 of 24
Sector Industry
t Consumer Cyclical Internet Retail In the future, we expect Etsy to onboard unique inventory, to expand its burgeoning international
operations (45%-50% of GMV), and to expand its suite of seller tools and advertising options, while
Business Description
Etsy operates a top-10 e-commerce marketplace periodically targeting competitively advantaged tuck-in acquisitions that offer exposure to similarly
operator in the U.S. and the U.K., with sizable operations differentiated end markets. Particularly important will be efforts to increase repeat purchase behavior,
in Germany, France, Australia, and Canada. The firm with the long-term driver of GMV growth likely to be increased average revenue per user in lieu of buyer
dominates an interesting niche, connecting buyers and
acquisition after the firm achieves saturation in its six key markets—getting buyers to go to Etsy “not
sellers through its online market to exchange vintage
just for the cushions, but for the couch.”
and craft goods. With $13.3 billion in 2022 consolidated
gross merchandise volume, the firm has cemented itself
Bulls Say Sean Dunlop, CFA, Equity Analyst, 6 Nov 2023
as one of the largest players in a quickly growing space,
generating revenue from listing fees, commissions on u Etsy's investments in its star seller program, purchase protection, and shipping time estimates should
sold items, advertising services, payment processing, help improve platform trust and may allow the firm to move upmarket toward inventory with higher
and shipping labels. As of the end of 2022, the firm average prices.
connected more than 95 million buyers and 7.5 million
u After more than doubling its 2019 buyer base, Etsy has likely reached a demand tipping point, with high
sellers on its marketplace properties: Etsy, Reverb
teens active buyer penetration across its core six markets heightening barriers to success for new
(musical equipment) and Depop (clothing resale).
entrants.
u The firm's increased reach in international markets and among customers who identify as men should
add a long-term leg to its active user growth journey.
Bears Say Sean Dunlop, CFA, Equity Analyst, 6 Nov 2023

u Without many high frequency items on its marketplace, Etsy lacks the natural traffic draw that larger e-
commerce peers like Amazon command and is commensurately more sensitive to cyclical factors.
u Local players may have an advantage in international markets, given their nuanced understanding of
those cultures and regulation that often favors homegrown companies.
u Ety's superdiscretionary product suite and the proliferation of drop-shipped, relatively commoditized
goods could see the marketplace operator struggle to increase the critical average platform spending
per user metric.
Economic Moat Sean Dunlop, CFA, Equity Analyst, 5 Nov 2023

The e-commerce industry is extremely competitive, featuring almost perfect price transparency,
fostering little customer loyalty, and engendering relentless competition to shave a few basis points
from costs, or to improve fulfillment speed by a couple of minutes on the margin. Attributable to a
surfeit of investor interest in the space, and minimal barriers to entry, the channel has seen everything
from the conception of myriad niche marketplaces (with five to 10 dedicated to some form of clothing
resale) to spinoffs of traditional retail companies' e-commerce apparatuses, laying the groundwork for
what appears to be an inevitable consolidation of digital shelf space over time. Operators positioned to
emerge from the maelstrom, in our view, are those that dig moats around enduring competitive
advantages: durable marketplace network effects, access to unique customer data or inventory, or
scale-driven cost advantages. In our view, Etsy is one of the few companies poised to emerge as one of
ß
Competitors
Shopify Inc Registered Shs -A- Subord Vtg
Etsy Inc ETSY Amazon.com Inc AMZN eBay Inc EBAY
SHOP
Fair Value Fair Value Fair Value

145.00 155.00 51.00 Last Close
Uncertainty : Very High Uncertainty : High Uncertainty : High 61.47
Last Close Fair Value
Last Close
65.25 138.60
Last Close 60.00
40.54 Uncertainty : Very High
Analysis Security 1 Security 2 Security 3 Security 4
Economic Moat Wide Wide Narrow Narrow

Currency USD USD USD USD
Fair Value 145.00 22 Aug 2023 20:45, UTC 155.00 27 Oct 2023 03:26, UTC 51.00 28 Jul 2023 23:02, UTC 60.00 2 Nov 2023 17:27, UTC
1-Star Price 253.75 240.25 79.05 105.00
5-Star Price 72.50 93.00 30.60 30.00
Significantly 5 Nov Fairly Valued 5 Nov 2023 Under Valued 5 Nov 2023 Fairly Valued 5 Nov 2023
Assessment
Undervalued 2023
Morningstar Rating QQQQQ3 Nov 2023 21:23, UTC QQQ3 Nov 2023 21:23, UTC QQQQ3 Nov 2023 21:23, UTC QQQ3 Nov 2023 21:24, UTC
Analyst Sean Dunlop, Equity Analyst Dan Romanoff, Senior Equity Analyst Sean Dunlop, Equity Analyst Dan Romanoff, Senior Equity Analyst
Capital Allocation Standard Exemplary Standard Standard
Price/Fair Value 0.45 0.89 0.79 1.02
Price/Sales 3.30 2.60 2.21 11.82
Price/Book 21.42 7.83 4.10 9.53
Price/Earning 26.42 72.57 17.11 —
Dividend Yield — — 2.39% —
Market Cap 7.81 Bil 1,432.30 Bil 21.57 Bil 78.94 Bil
52-Week Range 58.20—149.91 81.43—145.86 37.93—52.23 30.44—71.43
Investment Style Mid Growth Large Growth Mid Value Large Growth
e-commerce's long-term winners, eschewing competition in commoditized categories like fast-moving

consumer goods as the firm has recognized its inability to effectively compete for sales that are driven
principally by price and fulfillment speed considerations. Instead, the firm has built a competitively
advantaged marketplace around a catalog of non-traditional, unique, customizable, and artisanal
inventory, deriving a competitive edge from a network that grows more valuable as additional buyers
and sellers join the platform. Further, Etsy benefits from access to an almost entirely non-standardized
suite of more than 100 million products, with those items mapping to neither stock-keeping units nor
universal product codes, allowing the firm to develop search algorithms that would effectively be
impossible for peers to emulate. While Etsy's narrow purview naturally limits its long-term total
addressable market, it has allowed the firm to mobilize a network of some 7-8 million largely untapped
sellers (disproportionately from craft fairs and live selling events) and more than 95 million active buyers
at year-end 2022, en route to a commanding share of a fragmented craft market. Our wide moat rating
suggests a horizon for excess returns upwards of 20 years; a view embodied by our forecast for 48%
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average annual adjusted ROICs (including goodwill, capitalized development, marketing, and general
and administrative costs) through 2032, healthily exceeding our 8.7% weighted average cost of capital
estimate.
We believe that a complete discussion of Etsy's competitive advantages demands consideration of the
nature of the firm's network effect moat source and its quantitative underpinnings, the importance of
search engine optimization in the category, and a brief consideration of available alternatives.
Accordingly, considering the firm's network effect, we view a marketplace platform that grows
increasingly valuable as buyers and sellers are onboarded as one of the most powerful and rarest moat
sources in our coverage. While buyers are widely viewed as the economic engine of a marketplace, the
buyer experience is beholden in some capacity to the quality and depth of the seller pool. Access to a
platform with more and better sellers improves the buyer experience, reduces search costs, and
improves product discovery, all of which continue to improve as more sellers are onboarded. On the
seller side, access to a larger pool of buyers, particularly buyers with purchase intent and interest in
their category, often results in better sale prices, quickened inventory turnover, and reduced illiquidity-
induced discounts to product fair value. Thus, the seller experience improves as new buyers join the
platform, incentivizing further growth on both sides—a demand flywheel that is difficult to stop beyond
key tipping points, which we've estimated as 10% of the internet-using population in a geography in
past research. Ultimately, growth does not constitute an enduring competitive advantage. Rather, the
hallmark of an enduring network effect, and a direct reflection of the value added by a marketplace
operator—in the form of demand aggregation, enhanced trust, payment facilitation, dispute arbitration,
and business development tools—is the firm's ability to effectively monetize its platform without driving
participants to the exit.
In our view, Etsy scores well on all these counts, connecting 95 million active buyers and 7-8 million
active sellers across six key geographies (the U.S., U.K., Germany, France, Canada, and Australia) on a
marketplace that accounted for more than $13 billion in gross merchandise volume, or GMV, in 2022.
The firm's position looks durable, in our view, with World Bank data and our calculations suggesting
that Etsy's active buyer count is good for 15%-20% penetration across the aggregate internet-using
population in those six geographies. Perhaps more poignantly, the firm has been able to effectively
monetize that cohort, with our estimates suggesting a consolidated take rate (Etsy's take of $1 of
platform sales) of 19.3% in 2022, driven by listing fees, final value fees (6.5% on the core marketplace),
payment processing, offsite advertisements, shipping labels, and seller services. The firm's growth has
lifted results for both Etsy and its platform sellers, with a 33% GMV compound annual growth rate
(CAGR) over the last five years outstripping the 24% annual growth in broader U.S. e-commerce, despite
Etsy's take rate increasing by 580 basis points during that period. While a high-teens take rate falls well
shy of wide-moat Amazon's high-20% figure, it stacks up nicely against more relevant competitors like
narrow-moat eBay (14%) and niche marketplaces like recently acquired Depop (10%), with the lack of a
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proprietary fulfillment arm at Etsy accounting for the lion share of divergence with the e-commerce
behemoth.
Further, the firm provides a suite of valuable services for its buyers and sellers in support of its
marketplace. Buyers receive access to a truly unique product suite, catering to an audience that values
self-expression, unique decor, and supporting local artisans and entrepreneurs. The platform reduces
uncertainty, easing fears of fraudulent transactions and intermediates post-purchase conflicts, while
adding a uniquely “human” twist to notoriously depersonalized online shopping through a messaging
platform. On the seller side, Etsy amalgamates demand in an extremely fragmented end market, offering
access to a buyer base of more than 95 million potential customers, with language processing services
allowing sellers to tap into a global audience that otherwise would be inaccessible. Further, Etsy offers
a clean, easy to use user interface (UI) for smaller sellers, featuring a seller handbook and attractive
advertising rates that are likely much cheaper than rates to “go it alone.” For example, Etsy's offsite
advertising commissions are currently 12%-15% of sales prices and only charged for sales which convert
(a cost-per-action model, the most favorable for sellers). For sellers who choose to go it alone, utilizing
white-label solutions like narrow-moat Shopify, we'd expect much higher advertising outlays--
particularly considering the advertising spend among the largest direct-to-consumer brands on public
markets, which range from the midteens to the low-30s, by our estimates. Finally, and not
inconsequentially, we surmise the firm's search engine optimization efforts--underpinning our data-
driven intangible asset moat source--lead to better conversion and demand aggregation than would
likely be available on competitors' sites. Innovation continues to be seller-friendly, adding video and
augmented reality to make listings pop, investing heavily in platform development, and working
relentlessly to translate search terms to search intent.
The firm's competitive position largely insulates it from competing on the basis of price and fulfillment
speed, with an emphasis on non-commoditized products—often crafted, handmade, and
customized—disincentivizing multihoming and (generally) exempted from 24-hour delivery expectations.
In fact, internal surveys provide us with two important data points: first, that 87% of sellers agree that
Etsy has items on its site that you can't find anywhere else, and second, that only 56% of Etsy sellers are
multichannel sellers (implying that 44% derive all of their sales through Etsy). Critically, Etsy is the
primary sales channel for the vast majority of its sellers, with the second most prevalent being craft
shows and live selling events--dispelling the popular misconception that Amazon Handmade or eBay
compete heavily for category share. The firm's top categories: home furnishing, jewelry and personal
accessories, craft supplies, apparel, paper and party supplies, and beauty and personal care, reflect its
strategic emphasis, but naturally limit the viable total addressable market. To this point, our analysis of
e-commerce volumes in the U.S. and the firm's consolidated 2022 average revenue per user figure ($132
on the core marketplace) suggest that Etsy customers only deploy about 4% of their e-commerce dollars
on Etsy, a figure that offers plenty of white space but will likely never approach the figures of larger
ß
marketplaces with a larger mix of business-to-consumer, or B2C, sales like eBay ($500s) and Amazon
(estimates range from $600 for nonprime members to nearly $2,000 for prime customers). Nonetheless,
we're encouraged by positive cohort spending trends over time, with the firm's habitual buyers (7%-8%
of active buyers) now accounting for 40% of marketplace GMV, raising the “glass ceiling” for GMV
growth over time, since the biggest growth lever in the long term will likely shift toward user
monetization in lieu of user acquisition. In effect, we believe that Etsy is competitively advantaged and
can continue to grow its share of consumer wallets, but it's unlikely that we'll see the degree of
monetization we do from marketplaces that sell conventional B2C products—and that's OK.
Briefly considering the firm's subsidiary marketplaces (Reverb, Depop), which we haven't figured into
our moat calculus yet (representing 10%-15% of consolidated GMV), we take a positive view of the
firm's efforts to poach potential winners in advance of category consolidation. Time will tell whether the
market demands specialists in every category--apparel, handmade goods, musical instrument resale,
sneaker resale, home goods, and so on—but it certainly strikes us as unnecessary to have myriad
specialists within those categories, likely catalyzing near- to medium-term consolidation now that
access to capital has tightened up. Reverb, for example, competes for share with Sweetwater and a
handful of smaller marketplaces for musical instrument resale spending, while Depop operates in an
uber-fragmented clothing resale market that has seen micro-niches run the gamut from luxury resale to
subscription services to social selling. Take rates upon acquisition reflect lower platform value
exchange, generally clocking in around 10%, but back-office rationalization, marketing best practice
sharing, and modest cross selling could help accentuate the more attractive features of those
marketplaces, particularly if investor interest wanes and competitors are forced to get fit quickly, as
we've seen in 2022 and 2023. The option to process payments through the Depop marketplace offers
one vehicle for monetization, while advertising products are gradually being introduced across the firm's
smaller marketplace properties. Given that the apparel resale marketplace has only recently worked
toward integrating search customization (different results based on user search history), we surmise
that there are plenty of benefits "within the family" to sharing best practices for marketing, search, and
back-office functions.
Considering the firm's intangible assets, we view a proprietary product database of more than 100
million listings and aspects for unique goods--without a stock-keeping unit or unique product code
identifier--as a meaningful edge over peers who attempt to compete in the space. Given a seller base
that skews toward individual proprietors and micro-businesses, Etsy's algorithm is forced to translate
search intent--"men's cocktail apparel” should yield navy blazers, ties, or other items that share no key
words with the query--into meaningful results, without the benefit of typical merchandising experience
among sellers. Recognizing that a dress is approximately equivalent to a gown, or that a search for a
blue desk shouldn't uncover “blue desk lamps” requires constant tinkering and deep learning algorithms
(with natural language processing continuing to represent one of the most complex applications of
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artificial intelligence) but offers a meaningful edge over peers with fewer items for sale or more
homogenous products. In our view, the firm's algorithm is likely to get better as it gets bigger,
perpetuating the demand flywheel by increasing conversion, optimizing the “treasure hunt” search
experience, increasing the value of incremental impressions, allowing the firm to spend deeper into its
marketing curve, and closing the loop by further improving the algorithm. Recent efforts like “Xwalk,"
which collect 11 times the amount of data per search query, should continue to drive improvements in
search, with Etsy now privy to newer data like dwell time, which has proven important. Look no further
than GMV growth per dollar of product development--averaging nearly $30 over the next five years, by
our estimates--to evaluate the efficacy of those efforts.
Ultimately, we view a wide-moat rating as appropriate for Etsy, with our research suggesting that the
firm's network has reached critical mass in its key six markets, presenting a nearly insurmountable
barrier to success for new, like-minded entrants. While Etsy will continue to compete for sellers with
local consignment stores, niche marketplaces, social commerce, and white label (DIY) offerings, we
view the firm's easy-to-use seller services (catering to the firm's smaller clientele), self-reinforcing
marketplace network, and the continuously improving underlying value position as sufficient to defray
competitive pressure. We view Etsy as one of the likely winners in a quickly evolving space, with access
to a unique, differentiated product suite, strategic investments in the platform experience, and a
strengthening marketplace network auguring well for economic value creation through the 20-year
period implied by our wide-moat rating.
Fair Value and Profit Drivers Sean Dunlop, CFA, Equity Analyst, 5 Nov 2023
We're maintaining our $145 fair value estimate for Etsy after digesting the firm's third-quarter results.
While we're sympathetic to the market's concerns regarding the craft marketplace's growth prospects
and potential operating leverage, we continue to view its reaction as myopic. We continue to foresee a
route to double-digit gross merchandise sales, or GMS, growth and the margin leverage that begets as
soon as 2025.
We're encouraged by the marketplace operator's ability to retain the lion share of pandemic-induced
GMV gains, with GMV growing at a 36% CAGR over the past four years, healthily outpacing broader
U.S. e-commerce. The firm's improved scale drives a structurally more profitable model than prior to the
pandemic while magnifying the impact of any platform development or search optimization
investments—features that we believe the market continues to underappreciate.
The pandemic provided a massive boon to the craft marketplace operator, with tangled international
supply chains and shipping constraints tripping up larger peers precisely as online shopping demand
surged, while customers were impeded from frequenting physical stores. Gross merchandise volumes
effectively doubled overnight, and we're encouraged to see that the bulk of acquired customers have
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been retained even as those stores reopen. We view new user acquisition as an attractive vehicle for
ongoing growth, driven in part by the extension of more intelligent search engine optimization into key
international markets. By our estimates, 25% penetration (against 20% in the U.S. and U.K. today) in the
firm's top six markets would result in 150 million users for the core Etsy marketplace, with plenty of
incremental headroom beyond that figure as the firm deepens its reach with male consumers, across
more than 194 other countries, and with underpenetrated demographics more liable to frequent its
house of brands marketplaces Depop and Reverb.
Ultimately, between mid-single-digit nominal growth in GMV per buyer—6%—and penetration just
north of 165 million global buyers in 2032, we continue to view $40 billion as an achievable long-term
GMV target for Etsy, suggesting that GMV almost triples in 10 years. With the Etsy marketplace already
operating at 30% adjusted EBITDA margins and with subsidiary marketplaces slowly getting up to
speed, we view a route to nearly 20% average annual operating profit growth through 2032 as
plausible, corroborating mangagement's economic assessment of competitively advantaged peer-to-
peer marketplaces as "lightning in a bottle."
We concede that much of our valuation sits in the outyears for Etsy and struggle to identify any
company-specific catalysts that can kick-start growth independent of macroeconomic improvement.
Consumer spending remains spotty in the firm's core categories: home decor, apparel, crafts, gifts, and
beauty, and the company remains beholden to consumer sentiment and willingness to spend--though it
has defended its share in those core categories ably. Despite the near-term pressure, we view the
marketplace's long-term prospects as salient and struggle to identify a competitor that could
meaningfully encroach upon the firm's commanding position in the online artisanal craft
niche—creating a salient opportunity for long-term investors.
Risk and Uncertainty Sean Dunlop, CFA, Equity Analyst, 5 Nov 2023
The e-commerce industry is intensely competitive, marked by constant innovation, increasingly rapid
paths to scale, and low barriers to entry (despite relatively high barriers to success). Players are forced
to vie for developer talent, customer wallet share, and for sellers (on marketplace platforms), with
operators seeking to differentiate along the lines of product breadth and uniqueness, price, user
experience, and access to an attractive pool of active buyers. While Etsy’s product suite is competitively
differentiated, in our view, the firm's difficult to parse addressable market, position in a quickly evolving
e-commerce channel, and nascent younger marketplaces render appropriate a Very High Uncertainty
rating.
In our view, international exposure and recent merger and acquisition activity represent substantial
idiosyncratic risks. With 45%-50% of GMV tied to international markets, Etsy remains sensitive to foreign
exchange rate fluctuations, while forced to navigate sometimes discordant tax policies and tariffs across
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geographies. Moreover, though the acquisition of Depop offers exposure to attractive end markets, they
add a degree of integration risk, which could result in restructuring costs or fragmented management
attention.
While the firm is well positioned with respect to environmental, social, and governance risks, in our
view, we flag two areas of concern: the ability to attract developer talent sufficient to support the robust
growth the platform has recently, and potential data security concerns, with the firm responsible for any
personally identifiable information of its customers, with recent regulations (the General Data Protection
Regulation in Europe, and California Consumer Privacy Act) getting increasingly punitive.
Capital Allocation Sean Dunlop, CFA, Equity Analyst, 5 Nov 2023

We assign a Standard capital allocation rating for Etsy, reflecting the interplay among a fortress balance
sheet, our neutral assessment of value creation from investing activities, and a mixed policy for
shareholder returns.
With our forecast for just 1.3 times average net leverage over the next five years (net debt/adjusted
EBITDA), a paucity of near-term debt maturities, and a highly cash generative model--we forecast free
cash flow to the firm averaging 17% of sales between 2023-27--balance sheet risk appears minimal for
the marketplace operator. We believe that Etsy should encounter no difficulties in funding its
investments in headcount and platform development with internally generated funds, while retaining
substantial flexibility to invest in brand marketing and strategic acquisitions. With no principal
maturities until 2026, we view Etsy's balance sheet health as strong, despite the firm carrying $2.3
billion in gross debt as of the end of the third quarter of 2023.
Pivoting to investments, we believe that the firm’s forward prospects (and recent acquisition track
record) merit a fair rating. Internal spending on product development continues to generate attractive
returns--with our forecast suggesting that each dollar of product development cost yields (on average)
just shy of a $30 bump to GMV over the next five years--and the firm’s search engine optimization
initiatives should continue to bear fruit (and uphold the firm’s intangible asset moat) over time. Past
investments, including the platform’s migration to Google Cloud have clearly proven moat-accretive,
while upper-funnel marketing spend in international markets have seen the firm expand its addressable
market and diversify its revenue stream, deriving 45%-50% of GMV from non-U.S. markets.
On the other side of the coin, Etsy's recent acquisition record looks spotty at best, with the firm’s largest
(and most recent) acquisition, Depop, looking quite expensive relative to its competitive set, even after
factoring in a hefty premium for better positioning or a more attractive (disproportionately Gen Z)
customer base. The sticker price, $1.625 billion, suggested a more than a 23 times price/sales multiple
at deal closure, and the firm took a $1.045 billion impairment charge on the subsidiary during the third
quarter of 2022. An impairment charge on the firm's Elo7 ("the Etsy of Brazil") acquisition in the second
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quarter of 2023 also warrants scrutiny, with those deals both executed at the top of the market.
Hindsight is 20/20, of course, and we appreciate the strategic rationale for Etsy’s acquisition of its
“house of brands” marketplaces, with Reverb (musical instrument resale) and Depop (vintage clothing
resale) featuring unique inventories, operating peer to peer (P2P) platforms, commanding broad buyer
and seller bases, and potentially standing to benefit from best practice sharing and consolidated
general and administrative expenditures. Similar to a venture model, if a minority of the firm's
investments were to work (but those that did, to work brilliantly), then the firm would find itself in an
excellent competitive position, and we agree with the premise that the online commerce industry is
poised for consolidation over time. Particularly in an environment like today where peers like no-moat
The RealReal and smaller, privately held companies are forced to hold back on capital investment and
marketing, we identify substantial advantages to the incubation of smaller marketplaces under the
aegis of a scaled operator like Etsy, leading us to posit that the firm's strategy is sound, even if its
execution has been recently uninspiring (underpinning our "standard" assessment).
Finally, we view management’s capital returns philosophy as sound. The amount of shareholder
distributions looks appropriate, and we appreciate management’s investment waterfall—internal
investments, strategic acquisitions (when fairly priced), then share buybacks. Longer term, absent
further acquisitive activity, we'd anticipate pressure building for a cash dividend but would expect that
to come only after growth and investment opportunities slow meaningfully, perhaps toward the end of
our 10-year explicit forecast (2028). We anticipate 3%-4% average annual share buybacks between
2023-32, which we view as an appopriate use of capital only to the extent that shares trade below our
assessment of intrinsic value.
Analyst Notes Archive
Etsy Earnings: Revenue and Earnings Outperformance Don't Appease the Market; Shares Very Cheap
Sean Dunlop, CFA, Equity Analyst, 2 Nov 2023
We believe wide-moat Etsy offers compelling value for investors despite a brutal 2023, which has seen
its share price fall by a striking 45%. While we're sympathetic to the market's concerns regarding the
craft marketplace's growth prospects and potential operating leverage, we continue to view its reaction
as myopic. We continue to foresee a route to double-digit gross merchandise sales, or GMS, growth and
the margin leverage that begets as soon as 2025. With the firm's $3.04 billion in GMS, $636 million in
revenue, and $0.64 in diluted EPS all topping our quarterly estimates, we expect little change to our
$145 intrinsic valuation despite worse-than-expected fourth-quarter guidance (low-single-digit GMS
decline and a 2-percentage-point sequential fall in adjusted EBITDA margin at the midpoint).
Etsy is strikingly efficient for a company its size, generating $1.3 million in revenue per headcount at its
core marketplace and averaging $39, $49, and $14 in average incremental GMS per dollar of research
ß
and development, general and administrative, and marketing spending, respectively, between 2018 and
2022. It continues to defend category market share in its largest online verticals despite a clear
customer migration toward discounters and nondiscretionary items, and has seen a clear, marked uptick
in penetration with male and international buyers (up 9% and 7%, respectively) that should lay the
groundwork for durable growth inflection once macroeconomic pressures ease. We continue to foresee
a route to nearly $250 in GMS per buyer by 2032, and expect balanced growth between customer
acquisition and spending per buyer as the firm expands its global presence and reach among the male
population.
On balance, we're encouraged by Etsy's prospects, and encourage investors to consider building a
position in a marketplace that trades just 30% ahead of November 2019 prices despite boasting three
times the revenue and six times the operating profit that it did in that period.
Etsy Earnings: Tough Quarter As Macroeconomic Pressure Weighs, but Positive Trends Start To
Emerge Sean Dunlop, CFA, Equity Analyst, 3 Aug 2023
Wide-moat Etsy reported tough quarterly results, and we expect to trim our $162 fair value estimate by
a high-single-digit percentage as we contemplate near-term margin deleverage. Our reaction is
directionally consistent with the market, which sent shares swooning 6% in aftermarket trading as the
firm released lukewarm guidance (0.7% gross merchandise volume growth at the midpoint and
decelerating sales growth on a linked-quarter basis). Nevertheless, we remain ready buyers of the
name, and identify 1) continued growth in spending among new buyers on the platform; 2)
improvements in the firm's curation efforts; and 3) the rollout of a pricing tool, as important
developments for long-term investors and underappreciated growth levers. Shares trade at about a 40%
discount to our intrinsic valuation, and continue to look attractive for long-term investors. Driving our
valuation change, slowing near-term sales will likely result in slower margin recapture, leading us to
trim our 2023 and 2024 operating margin estimates to 12.4% and 14.6%, respectively, from 14.2% and
16.4% prior.
The artisanal marketplace has struggled to lap its commanding performance during the throes of COVID-
19, but it was encouraging to see an uptick in active buyers (2.5% annual growth) and stabilization in
the Etsy’s critical habitual buyer cohort (down 1.4% on a linked-quarter basis, at 7.1 million). By our
estimates, new buyers continue to increase their first-year spending on the platform (calculated with a
quarter lag), which at least partially underpins our forecast for mid-single-digit (5.7%) annual growth in
spending per active buyer over the next five years. We foresee Etsy returning to above-market rates of
growth as macroeconomic pressures ease, and believe that machine learning efforts to improve curation
and pricing tools (which could help sellers better pass along inflation) should provide medium-term
growth levers.
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Etsy Earnings: Attractive Valuation, but Marketplace's Return to Growth Hangs on

Macroenvironment Sean Dunlop, CFA, Equity Analyst, 4 May 2023
Our confidence on wide-moat Etsy's long-term prospects remains largely unchanged despite mixed first-
quarter earnings, but the firm's sensitivity to a very discretionary category mix—home decor, apparel,
jewelry, gifts, toys and games, and crafts—suggests that an inflection in gross merchandise sales
growth is likely to be macro-driven rather than company-specific. More concretely, we expect to lower
our five-year sales and operating income cumulative annual growth rates to 16% and 27% from 18%
and 30%, respectively, with pressure on consumer discretionary income looking set to extend a demand
recovery well into 2024—consistent with Morningstar's department forecast for just 1.4% growth in
real U.S. consumption spending in that year. On balance, we anticipate lowering our $167 fair value
estimate by a low-single-digit percentage, leaving shares trading at a substantial discount to our
intrinsic valuation.
Quarterly results were mixed, in our view, with $641 million in sales healthily edging our $605 million
forecast, but with $0.53 in diluted EPS missing our $0.60 estimate, largely due to investments in product
development (up 30%). Second-quarter guidance arrived a bit ahead of our initial prognosis on sales and
GMS, but 26% adjusted EBITDA guidance fell quite a bit behind our 27.6% expectation as the firm
invests more heavily in marketing behind its struggling apparel resale subsidiary, Depop, and laps one-
time tax benefits. On balance, we expect modestly improving GMS growth over the balance of the year
but less margin recapture than initially contemplated, suggesting that the firm doesn't return to 20%
operating margins until 2026, a year later than we'd previously expected.
Finally, with gross merchandise value falling 3% from the year-ago period, we sympathize with investor
frustration at the firm's protracted turnaround but maintain our view that the best is yet to come for the
craft marketplace.
Etsy Crafts a Solid Fourth Quarter, but Macroeconomic Headwinds Linger; Shares Still Cheap Sean
Dunlop, CFA, Equity Analyst, 23 Feb 2023
It would be hard to identify a marketplace with a heavier discretionary skew than Etsy, which makes the
firm's sequential acceleration in core marketplace platform sales growth relative to before the pandemic
(to 145% in the fourth quarter from 134% in the third) impressive. The craft marketplace isn't through
the woods yet, with sales slowing sharply in February as macroeconomic pressures remain pronounced.
However, we remain confident in our long-term forecast for nearly $45 billion in 2032 gross
merchandise volume and low 30s adjusted EBITDA margin for the marketplace operator. After digesting
fourth-quarter results, we don't expect to change our $170 fair value estimate. Our forecast for $3.04 in
diluted EPS in 2023 is also intact.
Etsy reported solid fourth-quarter results, with $807 million in net revenue edging our $774 million
ß
forecast, though $0.76 in diluted EPS missed our $0.86 estimate, attributable exclusively to share-based
compensation. The firm has seen spending per active buyer—perhaps the most important sales driver
moving forward—grow at an 8.2% CAGR relative to before the pandemic, and new buyer spending
patterns seem to reflect positive momentum. With Etsy continuing to invest heavily in search
optimization, platform trust, and unprompted awareness, we see a route to nearly $300 in platform
spending per buyer in a decade, implying roughly 5% real growth per year.
In another positive, Etsy now sees 22 million active male buyers, representing just under one fourth of
its active user base. The ability to better cater to an extra half of the global population should
meaningfully expand the firm's addressable market, even if those users' visits skew toward special
occasions and gifting. With 89.4 million active buyers and 5.4 million category-interested sellers on the
platform at year-end, Etsy's competitive position is nearly unassailable in its core markets, in our view,
and underpins our wide moat rating.
Shaving Our FVE on Macroeconomic Pressure Despite Resilient Sales for Wide-Moat Etsy; Shares
Still Cheap Sean Dunlop, CFA, Equity Analyst, 3 Nov 2022
Wide-moat Etsy posted resilient third-quarter results, with $594 million in sales and $3.0 billion in gross
merchandise sales edging our $567 and $2.9 billion forecasts. Results were particularly impressive
when juxtaposed against a worsening macroeconomic backdrop and acute pressure on e-commerce
competitors, with the online channel categorically skewing toward more discretionary products like
home decor, apparel, and crafts, where consumers typically first trim spending. More concretely, the
core Etsy marketplace is 2.3 times larger than the comparable period in 2019, representing only a
modest slowdown relative to second-quarter levels (2.4 times), which suggests to us that pressures from
reopening trends and stimulus have largely abated. By our estimates, this figure handily outstrips
broader U.S. e-commerce (mid-80's) and publicly traded e-commerce competitors (eBay at 2.5% and
Amazon around 40%), indicating that the artisanal marketplace remains on much firmer competitive
footing than the market gives it credit for. Nevertheless, we expect to lower our $180 fair value estimate
by a high-single-digit percentage in light of our expectations for slower growth in 2023 and 2024,
corroborated by fourth-quarter guidance below our ex ante forecasts—with rising costs of borrowing
and persistent inflation likely to curtail consumption spending over the next four to six quarters, in our
view.
We continue to see craft marketplace products as less discretionary than market valuations suggest,
with three key arguments underpinning relative stability: competitive pricing, which is attributable to
only modest price increases by sellers (9% cumulatively over the past five years), the relative insulation
of gift and occasion purchases from belt-tightening, and the perception of many of Etsy's products as an
affordable luxury. We see a plausible route to $40 billion in GMS by 2031, with mid-single-digit gains in
average real spending per buyer striking us as reasonable.
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No Change to Standard Capital Allocation for Etsy as Rachana Kumar Steps Into CTO Role Sean
Dunlop, CFA, Equity Analyst, 28 Oct 2022
Wide-moat Etsy announced a C-suite shakeup on Oct. 27, with long-time employee Rachana Kumar set
to replace Mike Fisher as the firm's chief technology officer. Kumar is a consummate internal hire,
having served with Etsy in a variety of roles (most recently as VP of Engineering) since 2014, and we
don't expect the move to correspond with any marked shift in strategy. Consequently, we neither expect
to move our $180 fair value estimate nor revisit our Standard capital allocation rating on the news. With
find shares attractive, trading at a sharp discount (roughly 45%) to our intrinsic valuation.
Fisher led the firm's transition to the Google Cloud in 2018, permitting the marketplace to better handle
the volumetric surge it experienced during the COVID-19 pandemic. Having joined the marketplace
operator in 2017 with CEO Josh Silverman, Fisher presided over a period in which the marketplace
operator saw consolidated gross merchandise sales roughly quadruple, from $3.3 billion in 2017 to $13.5
billion in 2021.
We're encouraged to see Etsy backfill the role internally, suggestive of a deep internal bench and a
commitment to succession planning. With roughly eight years of experience with the largest global craft
marketplace, and with Fisher set to serve in an advisory capacity until April of 2023, we expect the
transition to be relatively seamless. Shares fell nearly 6% after hours, though we think the move was
reflective of e-commerce bellwether wide-moat Amazon's quarterly earnings report than the leadership
change. K
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Competitors Price vs. Fair Value
Amazon.com Inc AMZN
Fair Value: 155.00

27 Oct 2023 03:26, UTC
200
Last Close: 138.60
150 Over Valued
Under Valued
100
50
0
Analytics
2018 2019 2020 2021 2022 YTD
0.68 0.80 0.90 0.81 0.56 0.89 Price/Fair Value
28.43 23.03 76.26 2.38 -49.62 65.00 Total Return %
Morningstar Rating
Total Return % as of 3 Nov 2023. Last Close as of 3 Nov 2023. Fair Value as of 27 Oct 2023 03:26, UTC.
eBay Inc EBAY
Fair Value: 51.00

28 Jul 2023 23:02, UTC
200
Last Close: 40.54
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD Analytics
0.78 0.95 0.91 0.92 0.69 0.79 Price/Fair Value

-25.62 30.64 40.93 33.77 -36.32 -0.43 Total Return %
Morningstar Rating
Total Return % as of 3 Nov 2023. Last Close as of 3 Nov 2023. Fair Value as of 28 Jul 2023 23:02, UTC.
ß
Shopify Inc Registered Shs -A- Subord Vtg SHOP
Last Close: 61.47

200 Fair Value: 60.00
2 Nov 2023 17:27, UTC
150 Over Valued

Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD Analytics
0.92 2.27 2.28 1.60 0.77 1.02 Price/Fair Value

37.08 187.17 184.71 21.68 -74.80 77.10 Total Return %
Morningstar Rating
Total Return % as of 3 Nov 2023. Last Close as of 3 Nov 2023. Fair Value as of 2 Nov 2023 17:27, UTC.
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Morningstar Historical Summary

Financials as of 30 Sep 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (USD Mil) 125 196 273 365 441 604 818 1,726 2,329 2,566 1,906 2,713
Revenue Growth % 67.6 56.5 39.8 33.4 20.9 36.8 35.6 110 35.0 10.2 8.4 9.6
EBITDA (USD Mil) 12.74 7.55 -7.92 26.85 70.59 104.00 153.00 465.92 555.81 -551.11 300.76 -571.37
EBITDA Margin % 10.2 3.9 -2.9 7.4 16.0 17.2 18.7 27.0 23.9 -21.5 15.8 -21.1
Operating Income (USD Mil) 0.73 -6.25 -1.88 18.13 15.06 74.79 88.76 424.01 465.73 386.46 232.47 371.82
Operating Margin % 0.6 -3.2 -0.7 5.0 3.4 12.4 10.9 24.6 20.0 15.1 12.2 13.7
Net Income (USD Mil) -0.80 -15.24 -54.06 -29.90 81.80 77.49 95.89 349.25 493.51 -694.29 224.30 333.85
Net Margin % -0.6 -7.8 -19.8 -8.2 18.5 12.8 11.7 20.2 21.2 -27.1 11.8 12.3
Diluted Shares Outstanding (Mil) 94 111 91 114 122 127 126 136 147 127 141 137
Diluted Earnings Per Share (USD) -0.01 -0.14 -0.59 -0.26 0.68 0.61 0.76 2.69 3.40 -5.48 1.62 2.47
Dividends Per Share (USD) — — — — — — — — — — — —
Valuation as of 31 Oct 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales — — 3.7 3.9 5.9 11.1 7.5 17.0 14.2 6.4 3.0 2.9
Price/Earnings — — -16.9 -147.1 156.3
Years 71.9 53.5 97.1 64.5 -22.9
Years -11.5 -11.1
Years
Price/Cash Flow — — 48.3 34.5 49.8 45.5 24.4 45.7 52.6 23.3 11.7 11.3
Dividend Yield % — — — — — — — — — — — —
Price/Book — — 2.9 4.0 7.2 14.4 13.5 33.6 52.1 Years
-24.7 -16.6 Years
-16.1
EV/EBITDA 0.0 0.0 -89.1 Years
43.1 31.9 52.4 34.4 47.2 52.7 Years
-29.8 0.0 0.0
Operating Performance / Profitability as of 30 Sep 2023 Years Years Years
Years Years Years Years Years Years Years Years
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % -0.8 -8.6 -13.5 -5.3 13.8 10.3 7.9 17.7 15.8 -21.5 — 13.6
ROE % -19.9 -42.9 -27.2 -8.9 22.0 19.4 23.8 60.8 72.0 -1707 — —
ROIC % -13.1 -23.4 -20.6 -6.6 19.7 14.4 10.4 24.6 20.5 -28.5 — —
Asset Turnover 1.2 1.1 0.7 0.6 0.7 0.8 0.7 0.9 0.7 0.8 — 1.1
Financial Leverage
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % 0.9 44.4 15.2 15.4 13.9 45.8 67.4 59.9 79.1 — — —
Equity/Assets % 3.8 27.2 59.8 59.3 65.5 44.5 26.4 30.9 16.4 — — —
Total Debt/EBITDA 0.1 7.3 -8.2 2.6 1.0 3.3 5.5 2.4 4.3 — — —
EBITDA/Interest Expense 41.9 12.8 -5.2 3.7 6.3 4.7 6.3 11.1 56.2 -38.9 — —
Morningstar Analyst Historical/Forecast Summary as of 02 Nov 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 31 Dec 2022 2021 2022 2023 2024 2025
Price/Sales 11.9 5.9 2.9 2.7 2.3
Revenue (USD Mil) 2,329 2,566 2,727 2,918 3,399 Price/Earnings 65.2 352.3 23.1 24.6 18.6
Revenue Growth % 35.0 10.2 6.3 7.0 16.5 Price/Cash Flow — — — — —
EBITDA (USD Mil) 540 483 440 496 633 Dividend Yield % — — — — —
EBITDA Margin % 23.2 18.8 16.1 17.0 18.6 Price/Book 51.0 -230.3 -41.8 59.9 -85.9
EV/EBITDA 54.3 34.0 21.0 18.6 14.6
Operating Income (USD Mil) 466 386 350 406 538
Operating Margin % 20.0 15.1 12.8 13.9 15.8
Net Income (USD Mil) 494 351 396 372 478
Net Margin % 21.2 13.7 14.5 12.8 14.1
Diluted Shares Outstanding (Mil) 147 1,045 140 140 136
Diluted Earnings Per Share(USD) 3.36 0.34 2.82 2.65 3.51
Dividends Per Share(USD) 0.00 0.00 0.00 0.00 0.00
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ESG Risk Rating Breakdown
Values
Exposure Subject Subindustry (38.0) u Exposure represents a company’s vulnerability to ESG
Company Exposure 1
36.5 risks driven by their business model
36.5
u Exposure is assessed at the Subindustry level and then
– Manageable Risk 33.9 Medium
2 0 55+ specified at the company level
Unmanageable Risk 2.6 u Scoring ranges from 0-55+ with categories of low, me-
Low Medium High
dium, and high-risk exposure
Management Values u Management measures a company ’s ability to manage

Manageable Risk 33.9 ESG risks through its commitments and actions
43.8%
– Managed Risk3 14.9 Average
u Management assesses a company's efficiency on ESG
Management Gap4 19.1 100 0 programs, practices, and policies

Strong Average Weak u Management score ranges from 0-100% showing how
Overall Unmanaged Risk 21.6 much manageable risk a company is managing
ESG Risk Rating ESG Risk Rating Assessment5

21.64
Medium
Negligible Low Medium High Severe ESG Risk Rating is of Nov 01, 2023. Highest Controversy Level is as of Oct 08,
2023. Sustainalytics Subindustry: Internet Software and Services.
ESG Risk Ratings measure the degree to which a company’s value is impacted by environmental, social, and governance Sustainalytics provides Morningstar with company ESG ratings and metrics
risks, by evaluating the company’s ability to manage the ESG risks it faces. on a monthly basis and as such, the ratings in Morningstar may not
necessarily reflect current Sustainalytics’ scores for the company. For the
1. A company's Exposure to material ESG issues 2. Unmanageable Risk refers to risks that are inherent to a particular business model that cannot be managed by most up to date rating and more information, please visit: sustainalytics.com/
programs or initiatives 3. Managed Risk = Manageable Risk multiplied by a Management score of 43.8% 4. Management Gap assesses risks that are not esg-ratings/.
managed, but are considered manageable 5. ESG Risk Rating Assessment = Overall Unmanaged Risk = Management Gap plus Unmanageable Risk
Peer Analysis 01 Nov 2023 Peers are selected from the company's Sustainalytics-defined Subindustry and are displayed based on the closest market cap values
Company Name Exposure Management ESG Risk Rating
Etsy Inc 36.5 | Medium 0 55+ 43.8 | Average 100 0 21.6 | Medium 0 40+
Amazon.com Inc 41.5 | Medium 0 55+ 28.3 | Average 100 0 30.6 | High 0 40+
eBay Inc 37.7 | Medium 0 55+ 57.4 | Strong 100 0 17.6 | Low 0 40+
Shopify Inc 32.8 | Low 0 55+ 38.4 | Average 100 0 21.0 | Medium 0 40+
— —|— 0 55+ —|— 100 0 —|— 0 40+
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Appendix
Historical Morningstar Rating
Etsy Inc ETSY 3 Nov 2023 21:23, UTC
December November October September August July May May April March February January
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
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Amazon.com Inc AMZN 3 Nov 2023 21:23, UTC

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eBay Inc EBAY 3 Nov 2023 21:23, UTC

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Shopify Inc Registered Shs -A- Subord Vtg SHOP 3 Nov 2023 21:24, UTC
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QQQ - QQQ QQQ QQQ QQQ QQQ - - - - -
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Overview turns on invested capital (or ROIC) over and above our es- rive our annual free cash flow forecast.
At the heart of our valuation system is a detailed projec- timate of a firm’s cost of capital, or weighted average
Stage II: Fade
tion of a company’s future cash flows, resulting from our cost of capital (or WACC). Without a moat, profits are
The second stage of our model is the period it will take
analysts’ research. Analysts create custom industry and more susceptible to competition. We have identified five
the company ’s return on new invested capital—the re-
company assumptions to feed income statement, balance sources of economic moats: intangible assets, switching
turn on capital of the next dollar invested (“RONIC”)—to
sheet, and capital investment assumptions into our glob- costs, network effect, cost advantage, and efficient scale.
decline (or rise) to its cost of capital. During the Stage II
ally standardized, proprietary discounted cash flow, or
Companies with a narrow moat are those we believe are period, we use a formula to approximate cash flows in
DCF, modeling templates. We use scenario analysis, inde-
more likely than not to achieve normalized excess returns lieu of explicitly modeling the income statement, balance
pth competitive advantage analysis, and a variety of other
for at least the next 10 years. Wide-moat companies are sheet, and cash flow statement as we do in Stage I. The
analytical tools to augment this process. Moreover, we
those in which we have very high confidence that excess length of the second stage depends on the strength of
think analyzing valuation through discounted cash flows
returns will remain for 10 years, with excess returns more the company’s economic moat. We forecast this period to
presents a better lens for viewing cyclical companies,
likely than not to remain for at least 20 years. The longer last anywhere from one year (for companies with no eco-
high-growth firms, businesses with finite lives (e.g.,
a firm generates economic profits, the higher its intrinsic nomic moat) to 10–15 years or more (for wide-moat com-
mines), or companies expected to generate negative
value. We believe low-quality, no-moat companies will panies). During this period, cash flows are forecast using
earnings over the next few years. That said, we don’t dis-
see their normalized returns gravitate toward the firm’s four assumptions: an average growth rate for EBI over the
miss multiples altogether but rather use them as support-
cost of capital more quickly than companies with moats. period, a normalized investment rate, average return on
ing cross-checks for our DCF-based fair value estimates.
new invested capital (RONIC), and the number of years
We also acknowledge that DCF models offer their own
When considering a company's moat, we also assess until perpetuity, when excess returns cease. The invest-
challenges (including a potential proliferation of estim-
whether there is a substantial threat of value destruction, ment rate and return on new invested capital decline un-
ated inputs and the possibility that the method may miss
stemming from risks related to ESG, industry disruption, til a perpetuity value is calculated. In the case of firms
shortterm market-price movements), but we believe these
financial health, or other idiosyncratic issues. In this con- that do not earn their cost of capital, we assume marginal
negatives are mitigated by deep analysis and our
text, a risk is considered potentially value destructive if its ROICs rise to the firm’s cost of capital (usually attribut-
longterm approach.
occurrence would eliminate a firm’s economic profit on a able to less reinvestment), and we may truncate the
cumulative or midcycle basis. If we deem the probability second stage.
Morningstar’s equity research group (”we,” “our”) be-
lieves that a company’s intrinsic worth results from the of occurrence sufficiently high, we would not characterize
the company as possessing an economic moat. Stage III: Perpetuity
future cash flows it can generate. The Morningstar Rating
Once a company’s marginal ROIC hits its cost of capital,
for stocks identifies stocks trading at a discount or premi-
2. Estimated Fair Value we calculate a continuing value, using a standard per-
um to their intrinsic worth—or fair value estimate, in
Combining our analysts’ financial forecasts with the petuity formula. At perpetuity, we assume that any
Morningstar terminology. Five-star stocks sell for the
firm’s economic moat helps us assess how long returns growth or decline or investment in the business neither
biggest risk adjusted discount to their fair values, where-
on invested capital are likely to exceed the firm’s cost of creates nor destroys value and that any new investment
as 1-star stocks trade at premiums to their intrinsic worth.
capital. Returns of firms with a wide economic moat rat- provides a return in line with estimated WACC.
Four key components drive the Morningstar rating: (1) our ing are assumed to fade to the perpetuity period over a
longer period of time than the returns of narrow-moat Because a dollar earned today is worth more than a dollar
assessment of the firm’s economic moat, (2) our estimate
firms, and both will fade slower than no-moat firms, in- earned tomorrow, we discount our projections of cash
of the stock’s fair value, (3) our uncertainty around that
creasing our estimate of their intrinsic value. flows in stages I, II, and III to arrive at a total present
fair value estimate and (4) the current market price. This
value of expected future cash flows. Because we are
process ultimately culminates in our singlepoint star rat-
Our model is divided into three distinct stages: modeling free cash flow to the firm—representing cash
ing.
available to provide a return to all capital providers—we
discount future cash flows using the WACC, which is a
1. Economic Moat Stage I: Explicit Forecast
weighted average of the costs of equity, debt, and pre-
The concept of an economic moat plays a vital role not In this stage, which can last five to 10 years, analysts
ferred stock (and any other funding sources), using ex-
only in our qualitative assessment of a firm’s long-term make full financial statement forecasts, including items
pected future proportionate long-term, market-value
investment potential, but also in the actual calculation of such as revenue, profit margins, tax rates, changes in
weights.
our fair value estimates. An economic moat is a structural workingcapital accounts, and capital spending. Based on
feature that allows a firm to sustain excess profits over a these projections, we calculate earnings before interest,
3. Uncertainty Around That Fair Value Estimate
long period of time. We define economic profits as re- after taxes (EBI) and the net new investment (NNI) to de-
Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company ’s intrinsic
Morningstar Equity Research Star Rating Methodology
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
aimed at identifying the confidence we should have in as-
signing a fair value estimate for a given stock.
Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
ß
thing that can affect our ability to accurately predict Morningstar Equity Research Star Rating Methodology
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain
we are about the potential dispersion of outcomes, the
greater the discount we require relative to our estimate of
the value of the firm before we would recommend the
purchase of the shares. In addition, the Uncertainty Rat-
ing provides guidance in portfolio construction based on
risk tolerance. Once we determine the fair value estimate of a stock, we justed return is highly likely over a multiyear time frame.
compare it with the stock’s current market price on a Scenario analysis developed by our analysts indicates
Our Uncertainty Ratings are: Low, Medium, High, Very daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
High, and Extreme. lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
which the stock is listed is open. Our analysts keep close ing upside potential.
Margin of Safety
tabs on the companies they follow, and, based on thor-
Qualitative Analysis
QRating ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Uncertainty Ratings QQQQQRating
estimates as warranted. justed return is likely.
Low 20% Discount 25% Premium
Medium 30% Discount 35% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
High 40% Discount 55% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
Very High 50% Discount 75% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Extreme 75% Discount 300% Premium serve as a gauge of the broader market’s valuation. When
there are many 5-star stocks, the stock market as a whole QQ We believe investors are likely to receive a less than
Our uncertainty rating is based on the interquartile range, fair risk-adjusted return.
is more undervalued, in our opinion, than when very few
or the middle 50% of potential outcomes, covering the
companies garner our highest rating.
25th percentile–75th percentile. This means that when a Q Indicates a high probability of undesirable risk-adjus-
stock hits 5 stars, we expect there is a 75% chance that ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
the intrinsic value of that stock lies above the current time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
market price. Similarly, when a stock hits 1 star, we ex- our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
pect there is a 75% chance that the intrinsic value of that cessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
stock lies below the current market price. leaving the investor exposed to Capital loss.
prices may adjust).
4. Market Price Our star ratings are guideposts to a broad audience and Other Definitions
The market prices used in this analysis and noted in the individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
report come from exchange on which the stock is listed goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
which we believe is a reliable source. needs, and complete investment portfolio, among other
factors. Capital Allocation Rating: Our Capital Allocation (or
For more details about our methodology, please go to Stewardship) Rating represents our assessment of the
https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be- quality of management’s capital allocation, with particu-
low: lar emphasis on the firm ’s balance sheet, investments,
Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk ad- and shareholder distributions. Analysts consider compan-
ß
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing mendations made herein may not be suitable for all in-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- vestors: recipients must exercise their own independent
Corporate governance factors are only considered if they aged ESG Risk score is below 50. judgment as to the suitability of such investments and re-
are likely to materially impact shareholder value, though commendations in the light of their own investment ob-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are jectives, experience, taxation status and financial posi-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, tion.
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute,
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- The information, data, analyses and opinions presented
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- herein are not warranted to be accurate, correct, com-
Standard rating is most common as most managers will tries covered. plete or timely. Unless otherwise provided in a separate
exhibit neither exceptionally strong nor poor capital alloc- agreement, neither Morningstar, Inc. or the Equity Re-
ation. The ESG Risk Rating Assessment is a visual representa- search Group represents that the report contents meet all
tion of Sustainalytics ESG Risk Categories on a 1 to 5 of the presentation and/or disclosure standards applic-
Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low able in the jurisdiction the recipient is located.
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes,
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit Except as otherwise required by law or provided for in a
dividend and share buyback policies, analysts also con- sustainalytics.com/esg-ratings/ separate agreement, the analyst, Morningstar, Inc. and
sidered execution, compensation, related party transac- the Equity Research Group and their officers, directors
tions, and accounting practices in the rating. Ratings should not be used as the sole basis in evaluating and employees shall not be responsible or liable for any
a company or security. Ratings involve unknown risks and trading decisions, damages or other losses resulting from,
Capital Allocation Rating: Our Capital Allocation (or uncertainties which may cause our expectations not to or related to, the information, data, analyses or opinions
Stewardship) Rating represents our assessment of the occur or to differ significantly from what was expected within the report. The Equity Research Group encourages
quality of management’s capital allocation, with particu- and should not be considered an offer or solicitation to recipients recipients of this report to read all relevant is-
lar emphasis on the firm’s balance sheet, investments, buy or sell a security. sue documents (e.g., prospectus) pertaining to the secur-
and shareholder distributions. Analysts consider compan- ity concerned, including without limitation, information
ies’ investment strategy and valuation, balance sheet Risk Warning relevant to its investment objectives, risks, and costs be-
management, and dividend and share buyback policies. Please note that investments in securities are subject to fore making an in vestment decision and when deemed
Corporate governance factors are only considered if they market and other risks and there is no assurance or guar- necessary, to seek the advice of a legal, tax, and/or ac-
are likely to materially impact shareholder value, though antee that the intended investment objectives will be counting professional.
either the balance sheet, investment, or shareholder dis- achieved. Past performance of a security may or may not
tributions. Analysts assign one of three ratings: "Exem- be sustained in future and is no indication of future per- The Report and its contents are not directed to, or inten-
plary", "Standard", or "Poor". Analysts judge Capital Alloc- formance. A security investment return and an investor ’s ded for distribution to or use by, any person or entity who
ation from an equity holder’s perspective. Ratings are de- principal value will fluctuate so that, when redeemed, an is a citizen or resident of or located in any locality, state,
termined on a forward looking and absolute basis. The investor ’s shares may be worth more or less than their country or other jurisdiction where such distribution, pub-
Standard rating is most common as most managers will original cost. A security’s current investment performance lication, availability or use would be contrary to law or
exhibit neither exceptionally strong nor poor capital alloc- may be lower or higher than the investment performance regulation or which would subject Morningstar, Inc. or its
ation. noted within the report. Morningstar’s Uncertainty Rating affiliates to any registration or licensing requirements in
serves as a useful data point with respect to sensitivity such jurisdiction.
Capital Allocation (or Stewardship) analysis published pri- analysis of the assumptions used in our determining a fair
or to Dec. 9, 2020, was determined using a different pro- value price. Where this report is made available in a language other
cess. Beyond investment strategy, financial leverage, and than English and in the case of inconsistencies between
dividend and share buyback policies, analysts also con- the English and translated versions of the report, the Eng-
sidered execution, compensation, related party transac- General Disclosure lish version will control and supersede any ambiguities
tions, and accounting practices in the rating. associated with any part or section of a report that has
Unless otherwise provided in a separate agreement, re-
cipients accessing this report may only use it in the coun- been issued in a foreign language. Neither the analyst,
Sustainalytics ESG Risk Rating Assessment:The ESG Morningstar, Inc., or the Equity Research Group guaran-
try in which the Morningstar distributor is based. Unless
Risk Rating Assessment is provided by Sustainalytics; a tees the accuracy of the translations.
stated otherwise, the original distributor of the report is
Morningstar company.
Morningstar Research Services LLC, a U.S.A. domiciled
financial institution. This report may be distributed in certain localities, coun-
Sustainalytics’ ESG Risk Ratings measure the degree to tries and/or jurisdictions (“Territories ”) by independent
which company’s economic value at risk is driven by en- third parties or independent intermediaries and/or distrib-
This report is for informational purposes only and has no
vironment, social and governance (ESG) factors. utors (“Distributors”). Such Distributors are not acting as
regard to the specific investment objectives, financial
situation or particular needs of any specific recipient. This agents or representatives of the analyst, Morningstar,
Sustainalytics analyzes over 1,300 data points to assess a Inc. or the Equity Research Group. In Territories where a
publication is intended to provide information to assist in-
company’s exposure to and management of ESG risks. In Distributor distributes our report, the Distributor is solely
stitutional investors in making their own investment de-
other words, ESG Risk Ratings measures a company’s un- responsible for complying with all applicable regulations,
cisions, not to provide investment advice to any specific
managed ESG Risks represented as a quantitative score. laws, rules, circulars, codes and guidelines established by
investor. Therefore, investments discussed and recom-
Unmanaged Risk is measured on an open-ended scale
ß
local and/or regional regulatory bodies, including laws in Limited. Morningstar Investment Adviser India Private
For a list of securities which the Equity Research Group
connection with the distribution third-party research re- Limited is registered with SEBI as a Portfolio Manager (re-
currently covers and provides written analysis on please
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torical analysis of securities covered, including their fair
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value estimate, please contact your local office.
u No interests are held by the analyst with respect to the subject of any disciplinary action by SEBI or any other leg-
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and distributed in Australia by Morningstar Australasia
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Pty Ltd (ABN: 95 090 665 544; ASFL: 240892). Morning-
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Inc.’s overall earnings and consists of salary, bonus within the last 12 months, nor have they or their asso-
To the extent the Report contains general advice it has
and in some cases restricted stock. ciates engaged in market-making activity for the fund
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u Neither Morningstar, Inc. or the Equity Research Group company.
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they charge companies to be rated. *The Conflicts of Interest disclosure above also applies to
able, the relevant Product Disclosure Statement before
u Neither Morningstar, Inc. or the Equity Research Group relatives and associates of Manager Research Analysts in
making any decision to invest. Refer to our Financial Ser-
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www.morningstar.com.au/fsg.pdf
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mendations in this material are provided for general in-
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Morningstar Equity Analyst Report | Report as of 6 Nov 2023 01:16, UTC | Reporting Currency: USD | Trading Currency: USD

| Exchange: NASDAQ - ALL MARKETS Page 1 of 24

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Price vs. Fair Value

Fair Value: 145.00

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Bears Say Sean Dunlop, CFA, Equity Analyst, 6 Nov 2023

Economic Moat Sean Dunlop, CFA, Equity Analyst, 5 Nov 2023

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Fair Value Fair Value Fair Value

Analysis Security 1 Security 2 Security 3 Security 4

Economic Moat Wide Wide Narrow Narrow

e-commerce's long-term winners, eschewing competition in commoditized categories like fast-moving

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Capital Allocation Sean Dunlop, CFA, Equity Analyst, 5 Nov 2023

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Analyst Notes Archive

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Etsy Earnings: Attractive Valuation, but Marketplace's Return to Growth Hangs on

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Competitors Price vs. Fair Value

Amazon.com Inc AMZN

Fair Value: 155.00

eBay Inc EBAY

Fair Value: 51.00

0.78 0.95 0.91 0.92 0.69 0.79 Price/Fair Value

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Shopify Inc Registered Shs -A- Subord Vtg SHOP

Last Close: 61.47

150 Over Valued

0.92 2.27 2.28 1.60 0.77 1.02 Price/Fair Value

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

Morningstar Historical Summary

Valuation as of 31 Oct 2023

Morningstar Analyst Historical/Forecast Summary as of 02 Nov 2023

Etsy Inc ETSY QQQQQ 3 Nov 2023 21:23, UTC

ESG Risk Rating Breakdown

Management Values u Management measures a company ’s ability to manage

Management Gap4 19.1 100 0 programs, practices, and policies

Overall Unmanaged Risk 21.6 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

— —|— 0 55+ —|— 100 0 —|— 0 40+

Amazon.com Inc AMZN 3 Nov 2023 21:23, UTC

eBay Inc EBAY 3 Nov 2023 21:23, UTC

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Research Methodology for Valuing Companies

Our recommended margin of safety—the discount to fair

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

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