Perhaps the best way to justify the lofty valuation Etsy Inc. seeks is to see the IPO as a prelude to a takeover.
The online marketplace for handmade and vintage goods is set to price its initial public offering Wednesday at a market value of at least $1.55 billion, or 8 times 2014 revenue. While that’s more than twice the multiple fetched by Internet retailers from Amazon.com Inc. and Zulily Inc., it’s within the range at which these types of companies tend to get bought.
Investors may be willing to pay that price, especially if they believe Etsy will attract suitors. The Brooklyn-based company has carved out a niche for itself, even if its losses are widening and its sales aren’t growing any faster than many peers that trade at a lower value. Topping the list of potential acquirers is EBay Inc., whose marketplace will need an avenue for expansion after it’s separated from the PayPal division.
“There are some natural buyers for Etsy, like EBay,” said Steve Sarracino, a partner at Activant Capital Group, a growth- equity firm focused on technology in Greenwich, Connecticut. “If the M&A premium didn’t exist, Etsy wouldn’t come out at this level. This one could trade pretty well in the aftermarket.”
Etsy and some of its backers are selling as much as $267 million of shares in the IPO. Goldman Sachs Group Inc., Morgan Stanley and Allen & Co. are managing the offering.
A representative for Etsy declined to comment on the IPO or the company’s sale prospects. A representative for EBay declined to comment on the company’s possible interest in Etsy.
While Etsy is growing, it isn’t outpacing other e-commerce companies. Its revenue increased 56 percent to $195.6 million last year, compared with 73 percent at Zulily, which sells clothes and apparel mostly to mothers. Zulily trades at 1.5 times last year’s sales and unlike Etsy is profitable.
However, Etsy is one of just seven technology companies to go public so far this year, data compiled by Bloomberg show. The scarcity of growth-oriented IPOs may accord Etsy a higher valuation, according to Gil Luria, an analyst at Wedbush Securities Inc.
“Top-line growth comes at a premium these days,” said Luria, who has a neutral rating on Etsy and expects the company to fetch $14 a share -- the low end of the IPO range -- in a year’s time. “There just aren’t that many companies going public with that kind of growth. There’s a lot of hunger for fast-growing companies and Etsy is there to feed that hunger.”
For EBay, Etsy could offer a new avenue for expansion. The company said in September it will spin off PayPal by the end of 2015. With the separation, EBay is losing a business that produced revenue growth at almost triple the rate of EBay’s marketplaces, data compiled by Bloomberg show.
Acquiring Etsy “might be a way for EBay to broaden its audience,” said RJ Hottovy, senior e-commerce analyst at Morningstar Inc. in Chicago. “With marketplaces, especially when you have a formidable competitor from Amazon, people are looking at what EBay can do to really broaden its business model and acquisitions will be a part of that.”
It wouldn’t be the first time EBay took the acquisition route. EBay bought PayPal just five months after the online- payment company raised $70 million in a February 2002 IPO.
By selling itself, Etsy could risk alienating the vendors who pay commissions and listing fees to offer their products on the site. Those customers consider their products art and many are already concerned that an IPO will make the company too corporate.
“Once Etsy has stockholders, the vision of Etsy will be controlled by those stockholders,” Debbie Miller, an Etsy seller, wrote on the company’s public forum last month. “I also think Etsy management ought to look at the demise of EBay occurring now and consider wisely the choices they make. They could be killing off a good thing.”
Etsy has engaged in several policies over the past few years, including allowing sellers to use manufacturers, that have increased competition on the site. The new standards have marginalized some artisans who say the company is departing from the handmade ethos in which it was founded.
“They added a lot of merchandise that doesn’t fit with their brand,” said Wedbush’s Luria. “If I go toEtsy, it’s because I want inexpensive, unique items that are handcrafted or vintage that I couldn’t find on EBay or Amazon.”
--With assistance from Brooke Sutherland, Tara Lachapelle and Alex Barinka in New York and Spencer Soper in San Francisco.