Etsy Buys Depop for $1.6 Billion

Etsy's Acquisition of Depop: A Gen Z Play

This morning’s announcement regarding Etsy’s planned acquisition of Depop, a secondhand e-commerce platform, for a sum exceeding $1.6 billion, hasn’t significantly impacted the acquiring company’s stock price yet. However, it offers valuable insight into the premiums brands are prepared to pay for access to the Gen Z consumer base.

Deal Details

According to Etsy, the Depop transaction is valued at "$1.625 billion, consisting primarily of cash, subject to adjustments for Depop’s working capital, transaction costs, cash and debt, and certain deferred and unvested equity for Depop’s management and employees.”

As a publicly traded company undertaking a material transaction, Etsy has provided detailed information about the acquisition. Key details concerning Depop’s business performance are as follows:

2020 Gross Merchandise Sales (GMS) and Revenue: “Depop’s 2020 GMS and revenue were approximately $650 million and $70 million, respectively, with each figure representing over 100% year-over-year growth.”
Historical GMS Growth Trend: “From 2017 to 2020, Depop’s GMS experienced a compounded annual growth rate of nearly 80%.”

With $70 million in revenue for 2020, Depop is being acquired at a multiple of 23.2x its previous year’s revenue. While substantial, this valuation isn’t unreasonable for a company that benefited from accelerated growth during the pandemic. It’s worth noting that Etsy is assessing Depop similarly to a high-growth SaaS company rather than a traditional consumer marketplace.

Growth Rate Analysis

The e-commerce sector saw considerable gains during the pandemic, suggesting Depop’s growth rate would likely have been lower without these circumstances. The company’s historical GMS growth of “nearly 80%” from 2017-2020 includes the 100%+ growth recorded last year. Therefore, we can deduce that GMS growth at Depop was slower in 2017, 2018, and 2019, falling below the 80% mark.

Considering this, it’s pertinent to question whether Etsy is overpaying for Depop. Fortunately, competitors Poshmark and ThredUp are also publicly traded, providing a benchmark for comparison.

Here are the current revenue multiples for each competitor, based on more recent data (market capitalization data sourced from Google and Yahoo Finance; revenue data from company reports):

Poshmark Run-Rate Multiple (using Q1 2021 data): 10.8x.
ThredUp Run-Rate Multiple (using Q1 2021 data): 9.6x.

Poshmark and ThredUp reported revenue growth of 42% and 15.2%, respectively, in their latest quarters. Given this context, Depop’s multiple appears justifiable, as its faster growth warrants a higher valuation.

Profitability Considerations

Do profits factor into this assessment? Not significantly. Both Poshmark and ThredUp experienced losses in the first quarter ($74.5 million and $16.2 million, respectively), although both companies recorded elevated share-based compensation costs. Depop also operates at a loss, as Etsy noted in its announcement.

Since all three companies are currently unprofitable, it’s difficult to definitively state that one is more or less valuable than another based on profitability alone. Focusing on growth rates and revenue multiples becomes crucial.

Paying two times or more Poshmark’s current multiple – contingent on Depop’s Q1 2021 performance – for twice the growth seems reasonably justified.

Sustainability of Growth

The strong results Depop achieved in 2020 may be challenging to replicate in 2021. Without the boost from COVID-19, how quickly will Depop continue to grow, particularly from its already doubled revenue base? Any significant deceleration in revenue growth would complicate the acquisition.

However, the core value Etsy is acquiring extends beyond GMS and net losses. It’s acquiring access to the Gen Z demographic. This is the central argument presented to investors.

As stated in Etsy’s release, this explains the willingness to pay over 23x Depop’s 2020 revenues: the acquisition secures access to Gen Z’s brand loyalty. Gen Z isn’t typically the first demographic associated with Etsy, highlighting the strategic rationale behind the deal.

Key Takeaway

The Etsy-Depop deal demonstrates that major e-commerce companies are prepared to invest significantly in marketplaces favored by younger consumers. This is encouraging news for privately held companies with a strong Gen Z following.