Etsy's (ETSY) Resilience Through the Pandemic and Beyond

Etsy, Inc. (ETSY), an e-commerce platform beloved by craft enthusiasts everywhere, became one of the recent pandemic-era additions to the S&P 500 index.

In September, S&P Dow Jones Indices added Etsy to the S&P 500, removing H&R Block, Inc. (HRB), Coty Inc. (COTY), and Kohl's Corporation (KSS). Notably, the addition of Etsy, a Brooklyn-born crafts marketplace, came ahead of the anticipated addition of Tesla, Inc. (TSLA) due to potential questions about Tesla's profitability. Morningstar's David Whiston told Fortune that "stability of Tesla's earnings" may be behind S&P's decision.

The share price of Etsy, which is reporting third quarter earnings on Oct. 28, is up significantly from below $50 at the start of the year before the outbreak of COVID-19. While 2020 has been brutal to a lot of retailers, Etsy has been weathering the pandemic remarkably well as more consumers are shopping online, spending time at home, and picking up new hobbies.

"We view the pandemic as benefiting Etsy through an uptick in digital demand while also creating a window of opportunity to capture new customers looking to buy (COVID-19) masks," said Needham analyst Rick Patel. "We believe Etsy is making good progress in retaining these customers, which should fuel future growth."

While many retailers big and small have crashed since the rise of Amazon and eBay Inc. (EBAY), Etsy has stayed the course. In fact, 2020 may prove to be its biggest year yet. Etsy's performance in this pandemic is a result of its strategic positioning over the past 15 years – as well as Amazon's stumbles. In many ways, the core of Etsy's success is its mission to offer "handcrafted and differentiated" goods as well as allowing its visitors to browse and search for these unique products.

Come for the Masks, Stay for the Rest

In the second quarter, Etsy reported $356 million in mask sales, which the company described at the earnings call as "enough masks to stretch all the way from New York to London." The huge demand for face coverings also fueled non-mask sales, which jumped 93% in the same quarter, according to company data.

"Most of the customers who go to Etsy for the first time in order to buy masks end up buying other products too, and many of them will remain on the platform going forward," according to Needham analysts.

Masks aside, Etsy's top category of homewares and home furnishings was up 128% compared to a year before. The sales of craft supplies jumped 138%, and jewelry and accessory sales were also up 50%. The ability to browse, search, and more recently to save searches for relevant products is one part of Etsy's appeal to its buyers and sellers. The company's gross profit margin is expanding – it was 74% in the second quarter, an increase of 640 basis points compared to 67.6% a year before. 

Bigger Market

Etsy has performed so well in the past few months that the company is rethinking its addressable market. In 2019, Etsy estimated its target market at $100 billion, based on assumptions of the top six countries, separation of online and offline shopping experiences, and product differentiation.

"In fact, COVID has helped to explode each of those three assumptions. Etsy competes in almost every market in the world, not just the core six. And in fact the distinction between online and offline has all (but) evaporated in the past few months," Josh Silverman, Etsy's CEO, said on the earnings call. "When we pull back and look at what we've learned over the past three months, it reinforces my belief that the size of Etsy's addressable market starts with a T not with a B. All of this gives us even more conviction about the size of the pricing that Etsy is changing and the opportunity to invest to fully realize that growth."

Amazon Competition

Amazon will still likely dominate e-commerce ad spending, according to Insider Intelligence research. The firm projects Etsy's share of e-commerce ad spending to grow by nearly 70% to $133.2 million. 

Amazon did launch Handmade in 2015, but so far it hasn't deterred Etsy's growth. With continued improvements to Etsy's machine learning and experimentation with augmented reality features, Etsy is poised to remain competitive across handmade categories.

Many small crafts sellers on Amazon continue to compete against its "vast database of mass-produced merchandise," according to reporting by OneZero earlier this year. "One Amazon Handmade seller said that, at times, she cannot find her own store using Amazon's search feature," the firm reported. Amazon is trying to change that, planning to improve search and discovery features, as reported by Business Insider.

Until then, Etsy is likely to continue to benefit from increased online engagement, growing ad spending on all e-commerce platforms, and deeper differentiation of its platform as a go-to marketplace for unique, handmade goods.