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Will Etsy continue to win in 2021?

Yahoo Finance’s Julie Hyman, Myles Udland, and Brian Sozzi discuss e-commerce outlook with Shweta Khajuria, RBC Capital Markets Internet Analyst.

Video Transcript

JULIE HYMAN: Just a few shopping days until Christmas, of course. And if you want something before then, you might have to actually walk into a physical store to buy it. But as we know, there has been a boom in e-commerce this year. Let's talk more about that trend and the market share gains that we have seen. We want to bring in Shweta Khajuria. She is RBC Capital Market's Internet Analyst.

Shweta, thank you for being here. So as we think about this holiday season and look ahead to when we're going to get the full numbers, what are you expecting in terms of market share and in terms of how, perhaps, Americans' shopping habits have fundamentally changed?

SHWETA KHAJURIA: Yeah, well, let's see how e-commerce has done so far. I mean, Department of Commerce data shows that there was one point acceleration in October, another point of acceleration in online sales in November, and online demand remains elevated.

Back to your point, when you started, on Super Saturday, which is the last Saturday before Christmas, actually, foot traffic was down 40%, and online sales according to Adobe were up 30% year over year to about $1.6 billion just in one day.

So research shows that online penetration by the end of this year could reach 20% of all sales, up from about 17% or 18% last year, which is a significant increase when we think about how much of a pull forward in demand we have seen this year, just multiple years of growth just in one year. Online sales for holiday season alone are expected to be over 30% year over year this year. And that's compared to mid teens growth that we have seen in the past.

MYLES UDLAND: You know, so Shweta, picking up on that point about the multiple years in one year, that theme comes up in a variety of industries. If you look at that, I guess, the non-store retail as a percent total retail, it's had a couple of inflection points.

But the curve has actually accelerated its steepness over the last decade. Do you think that it's possible in the 2020s, we're talking about of market share gain per year, not per 2 and 1/2 or whatever the rate was kind of in the 2010s?

SHWETA KHAJURIA: Yeah. I mean, and also importantly, so in 2020, we've seen a clear step up in online penetration. And another question that we've been talking about with investors is also how sustainable are these gains? In 2021, where can it go? And who will be-- we have seen a lot of COVID winners from e-commerce to home gyms, et cetera.

And then the question then becomes, OK, well, how sustainable is this gain? And how sustainable is this penetration going forward? And one of the things is that we have now been in COVID for about nine months. And that is enough time for consumer behavior to change.

There are a lot of people who had perhaps never shopped online and are now transitioning to online shopping who will likely understand the benefits of convenience, who will likely understand the benefits of online shopping, and will remain online shoppers in 2021.

So I think that these elevated gains are here to stay. And there are some COVID winners, maybe not all, but some COVID winners that we think will have sustainable gains. And Amazon, for example, comes to mind.

JULIE HYMAN: And Shweta, just hold on for one second, people may still shop online, even after they feel safer. There you saw Dr. Anthony Fauci getting his COVID vaccine. He was getting the Moderna version of the vaccine. That was at an event at the National Institutes of Health. Health and Human Services Secretary Alex Azar also set to get his shot there as well. Brian Sozzi, why don't you pick it up?

BRIAN SOZZI: Yeah, Shweta, as part of that, we just saw Anthony Fauci get his COVID shot. But one player in the space that you cover is Etsy. And they have benefited greatly this year because of, really, higher mask sales. How do you think that will transition to 2021? At some point, mask sales have to slow. They have slowed a bit at Etsy. What does that mean for the stock?

SHWETA KHAJURIA: Yeah, absolutely. Well, let's just recap just a little bit. So in the third quarter, we saw the non-mask sales, gross merchandise sales, or GMS, which is top line for them, grew 93% year over year, which was very consistent with what we saw in the second quarter. This implies that even without masks, Etsy is actually seeing an elevated and consistent demand from consumers.

Now the second point is that in October and in November, we have seen elevated levels of online traffic on Etsy's website, as well as apps. In fact, it has accelerated in October and November compared to the third quarter because of the holiday season. So what gives us confidence that this demand is here to stay and is sustainable? Well, a few things.

First is going to be buyer retention. If we look back at all Etsy's filings, going back to their 10ks, we actually see very consistent and very sticky buyer cohort behavior, which is that they retain a very consistent level of buyers year after year. And this year has been an exceptional year for Etsy. Nobody thought that Etsy would get to a GMS level of $10 billion in this year alone, which is almost double of last year.

Second is buyer frequency. We have seen that GMS for active buyer, which is an indication of buyer frequency, has grown for several consecutive quarters. And that is a testament to product initiatives and product evolvement at FTC. And third is new buyer growth, which is also a driver. And Etsy is one of the few companies that is actually leaning into marketing spend, because it has been a great COVID beneficiary.

It has the capital. And it has actually taken advantage of marketing spend, which would allow the company to have to see new buyer growth. So these three, buyer retention, new buyer growth, as well as buyer frequency, all trending in the right direction with elevated levels of e-commerce gives us conviction that Etsy can see sustainable gains.

JULIE HYMAN: Which is impressive, considering the run that the stock has already had this year. Shweta Khajuria, thank you so much. Hope to talk to you in early 2021 about what we have seen looking back at the holiday season, RBC Capital Markets Internet Analyst. Thank you so much.