RESEARCH & STRATEGY Digital Marketplaces: The Business Model of the Internet Age Marvin Fong, CFA E-Commerce 212.527.3562 | mfong@btig.com PLEASE READ: IMPORTANT DISCLOSURES AND ANALYST’S CERTIFICATION APPEAR IN APPENDIX
E-commerce: Digital Marketplaces E-commerce: Digital Marketplaces Initiating Coverage on the following companies: ▪ Etsy, Inc. (ETSY, Buy, $59 PT; Mkt Cap: $6.8B) ▪ Multiple growth drivers; buyer reactivation is a free option not in our numbers ▪ Care.com, Inc. (CRCM, Buy, $23 PT; Mkt Cap $717MM) ▪ A care supercycle is coming and Care.com is the online leader with a growing portfolio of services ▪ MercadoLibre, Inc. (MELI, Buy, $395 PT; Mkt Cap $14.4B) ▪ Creating an integrated payments/e-commerce ecosystem in Latin America ▪ History suggests just 1 or 2 companies will dominate in payments and we like MELI’s prospects ▪ CarGurus, Inc. (CARG, Buy, $48 PT; Mkt Cap: $4.6B) ▪ Largest user base in the U.S., but only #3 by revenue ▪ Entering billion dollar adjacent markets ▪ TrueCar, Inc. (TRUE, Buy, $13 PT; Mkt Cap: $1.1B) ▪ Expectations have been reset to more reasonable levels; transformational changes coming in 2019 ▪ Cars.com, Inc. (CARS, Neutral; Mkt Cap: $1.8B) ▪ We believe CARS is being crowded out of dealers’ ad budgets ▪ Reportedly up for sale but we believe economics are not there for a financial buyer 2 Marvin Fong, CFA | E-Commerce PLEASE READ: IMPORTANT DISCLOSURES AND ANALYST’S CERTIFICATION APPEAR IN APPENDIX
E-commerce: Digital Marketplaces E-commerce: Digital Marketplaces Overview: E-commerce & Digital Marketplaces ▪ E-commerce is 9% of U.S. retail sales, but 16% ex. autos, food and prescription drugs ▪ We estimate retail sales will reach 28% share at maturity ▪ 40% of e-commerce in the U.S. and 50% globally occurs on a digital marketplace ▪ Marketplaces are powerful investment stories ▪ Rapid growth: the top 75 marketplaces globally grew 27% in 2017 ▪ Network effects, asset light and high margin BTIG Industry Analysis ▪ There’s more to the space than just Amazon (AMZN, Not Rated) ▪ 55 of the top 75 global marketplaces are growing faster than the U.S. e-commerce industry (16%) ▪ 10 things every investor should know about the future of e-commerce 3 Marvin Fong, CFA | E-Commerce PLEASE READ: IMPORTANT DISCLOSURES AND ANALYST’S CERTIFICATION APPEAR IN APPENDIX
E-commerce: Digital Marketplaces E-commerce: Digital Marketplaces 10 Things Every Investor Needs to Know About the Future of E-commerce ▪ Autos, grocery and prescription drugs ($2.2T in spending) are seeing a revolution in e-fulfillment ▪ A global online land grab will drive even more cross-border M&A ▪ Amazon is forcing retail into Google’s Arms ▪ Despite questionable economics, same-day delivery will remain hot ▪ The virtuous cycle of store closures will continue ▪ Online laggards are getting serious about e-commerce ▪ Half of brick & mortar sales still involve the Internet ▪ Online advertising is continuously becoming more effective ▪ As LTE before it, 5G will be a game changer ▪ Payments will play a pivotal role in the evolution of e-commerce 4 Marvin Fong, CFA | E-Commerce PLEASE READ: IMPORTANT DISCLOSURES AND ANALYST’S CERTIFICATION APPEAR IN APPENDIX
E-commerce: Digital Marketplaces E-commerce: Digital Marketplaces ▪ Marketplaces are investable even in the age of online giants ▪ In 15 out of 21 cases, impacted stocks were higher one year later, or 71% of the time Price Action Market Companies 1 Week 3 Months 1 Year Date Entrant Action Affected Day of Later Later Later 7/2/10 Google Acquires ITA EXPE (3%) (1%) 49% 56% 7/2/10 Google Acquires ITA BKNG (3%) 12% 91% 188% 12/17/12 Facebook Launches Nearby feature YELP (3%) (5%) 29% 243% 8/22/14 Uber UberFresh (later UberEats) GRUB (8%) (10%) (19%) (34%) 11/13/14 Facebook Launches Places directory YELP (4%) (4%) (24%) (55%) 11/20/14 Amazon Amazon Destinations EXPE (2%) (1%) 4% 47% 11/20/14 Amazon Amazon Destinations BKNG (0%) 1% (3%) 11% 3/30/15 Amazon Launches Home Services CRCM (2%) (10%) (22%) (22%) 3/30/15 Amazon Launched Home Services ANGI (2%) (6%) (0%) 30% 5/22/15 Amazon Launches Handmade ETSY (2%) (4%) (19%) (52%) 8/26/15 Amazon News Amazon testing restaurant delivery service GRUB (3%) 8% 6% 56% 12/15/15 Facebook News Facebook testing local business reviews YELP (9%) (6%) (29%) 19% 8/25/16 Amazon Launches Amazon Vehicles TRUE (10%) (7%) 19% 54% 8/25/16 Amazon Launches Amazon Vehicles TGNA (2%) (5%) 3% (8%) 8/25/16 Amazon Launches Amazon Vehicles AUTO (5%) (3%) (22%) (54%) 4/24/17 Amazon New furniture delivery options for marketplace sellers W (5%) 2% 65% 50% 5/12/17 Amazon WSJ highlights Amazon's interest in furntirue & appliance W (6%) (4%) 7% 31% 5/19/17 Facebook Integrates food delivery with main navigation page GRUB (2%) (1%) 22% 136% 9/22/17 Amazon Partners with Olo resturant software GRUB (3%) (2%) 34% 154% 10/12/17 Amazon Reports Will Launch Brazil Marketplace MELI (10%) (14%) 24% 25% 11/7/17 Amazon Amazon launches two new private label furniture brands W (6%) 1% 39% 110% 5/1/18 Facebook Announces dating feature MTCH (22%) (23%) (25%) n/a 5/16/18 Facebook Updates to dynamic and lead gen ads for autos TRUE (4%) 2% 32% n/a 5/16/18 Updates to dynamic and lead gen ads for autos CARS (4%) (2%) 9% n/a Coverage Status: Expedia (EXPE, Not Covered), Yelp (YELP, Not Covered), GrubHub (GRUB, Not Covered), Booking Holdings (BKNG, Not Covered), Care.com (CRCM, Buy, $23 PT), ANGI Homeservices (ANGI, Not Rated), Etsy (ETSY, Buy, $59 PT), TrueCar (TRUE, Buy, $13 PT), TEGNA (TGNA, Not Rated), Autoweb (AUTO, Not Rated), Wayfair (W, Not Rated), MercadoLibre (MELI, Buy, $395 PT), Match Group (MTCH, Neutral; Analyst: Brandon Ross), Cars.com (CARS, Neutral) Source: Company reports, BTIG. 5 Marvin Fong, CFA | E-Commerce PLEASE READ: IMPORTANT DISCLOSURES AND ANALYST’S CERTIFICATION APPEAR IN APPENDIX
E-commerce: Digital Marketplaces E-commerce: Digital Marketplaces BTIG Valuation Framework ▪ What we do not use to value marketplaces: GMV 3. 0x 2.6x 2. 5x 2. 0x 1.6x 5x 1. Highly variable 1.0x 0.9x 1. 0x 0.4x 0.3x 5x 0. 0.2x 0. 0x Company A Company B Company C Company D Company F Company G Company H Source: Factset, BTIG. ▪ We see valuation is a function of 3 factors: Growth, Margin Expansion and Fundamentals ▪ Long-term EBITDA Growth has robust explanatory power – captures both growth and margins 40x 35x 30x EV/EBITDA (2019) 25x 20x S&P 15x 500 10x 5x R² = 0.88 0x 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 5-Year Compound EBITDA Growth Source: Factset, BTIG. 6 Marvin Fong, CFA | E-Commerce PLEASE READ: IMPORTANT DISCLOSURES AND ANALYST’S CERTIFICATION APPEAR IN APPENDIX
E-commerce: Digital Marketplaces E-commerce: Digital Marketplaces Key Metrics Etsy (ETSY, Buy, $59 PT; Mkt Cap $6.8B) : Investors Should Tune in for This Handmade’s Tale ▪ Price (11/12/18) : $50.71 ▪ Enterprise Value: $6.3B ▪ Leading marketplace for handmade/small-batch goods ▪ 52-Wk High/Low: $15.27 - $55.71 ▪ Why are we positive on the stock? ▪ Current Valuation: 33x 2019 Adj. EBITDA ▪ Amazon-baptized business model ▪ Target Valuation: 31x 2020 Adj. EBITDA ▪ Stock Performance ▪ Numerous underappreciated growth drivers ▪ Promoted Listings: Can triple in 5 years ▪ International: 35% of GMS going to 50% ▪ Conversion: $700-$800MM opportunity ▪ Commissions have some room to go up Source: IDC. ▪ What is the market missing? ▪ Revenue Mix (2018E) Shipping Labels ▪ Huge pool of inactive users (32MM vs. 37MM active) 5% Promoted Listings ▪ Every 5% reactivated grows GMS ~4% 21% Payments ▪ Paid GMS IRR >140% 30% Pattern & Other ▪ Promoted Listings economics only at ~60% of potential 2% Listing Dees Transaction 13% Revenue 29% Source: Company reports, BTIG. 7 Marvin Fong, CFA | E-Commerce PLEASE READ: IMPORTANT DISCLOSURES AND ANALYST’S CERTIFICATION APPEAR IN APPENDIX
E-commerce: Digital Marketplaces E-commerce: Digital Marketplaces How Our Etsy Call is Differentiated ▪ 5 Buys, 5 Neutrals, No Sells ▪ We lay out a road map to 20% revenue CAGR over the next 5 years ▪ Proprietary metrics we calculated based on our extensive analysis ▪ Number of inactive buyers (IR indicated no other analyst had done this) ▪ Traffic conversion rates and the total GMS upside from increasing conversion ▪ Promoted Listings potential ▪ IRR calculation on Paid GMS 8 Marvin Fong, CFA | E-Commerce PLEASE READ: IMPORTANT DISCLOSURES AND ANALYST’S CERTIFICATION APPEAR IN APPENDIX
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