Esty Valuation

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Esty an e-commerce website similar to Ebay that sells homemade items along with arts and crafts supplies. Its mission statement states that the company was made to support independent businesses and artists, and fathoms restoring community and culture to its commerce. The main office is located in Brooklyn, New York with a total of one hundred and twenty five employees. Etsy’s community spreads throughout the globe into one hundred and fifty countries around the world, and the community is rapidly expanding.

They gain revenue by charging a 3.5% sales fee on every transaction for every item and have a 20-cent listing fee for every item. They also allow sellers to buy advertisement to promote their items throughout their website.

As of 2009, Etsy had 1.8 Million members and 2 million listings in 150 countries. At the end of 2010, Etsy had a total of 7 million users.

In 2008, sales for Etsy totaled $88.23 Million. Sales increased to $180.6 Million in 2009 accounting for a 105% sales growth, and the total of sales generated in 2010 was $314.3 million accounting for a 74% growth from the previous year.

Etsy’s costs would be calculated from their office building in Brooklyn, the running and upkeep of their website, and the costs of employees’ salaries.

2)

We constructed a DCF model valuing Etsy as an all equity firm. Because Etsy is a private organization many assumptions were made in order to complete the model. From the Etsy website we acquired the revenue received by month over a three year basis from 2008 to 2010 as well as the unit sales, dollar sales, number of new items listed, new members, and page views. We added the monthly revenues in order to acquire the yearly revenue of sales per year. Since Etsy is a private firm the exact yearly costs could not be found, therefore, we conducted the costs biased on the information that a profit was not received towards the company until 2009. Therefore, we estimated the cost of 2008 to be 5million, 2009, 6million, and 2010, 7million. Etsy is still growing at a high rate so we estimated its 2011 revenue to be 20million. This leaves the EBIT for 2008 to be the only negative number. Because Etsy is being conducted as an all equity firm there was no interest collected for either year. We found the tax rate to be 40%, leaving the net income positive for all three years besides 2008. Using the beta of Etsy’s three competitors (Ebay, Amazon, and Overstock) and finding the average, we conducted the beta of Etsy to be 1.56. We used today’s MRP of 6.5% and RF of 2% along with the average beta to conduct CAPM and found Etsy’s rate of equity to be .1214. From then on we used to growing perpetuity formula at a 2% growth rate and discounted using the WACC to find the NPV to be  $76,320,402.14.

3)

We also used relative valuation stating Etsy as an all equity firm to find Etsy’s value. Using three of Etsy’s competitors (Ebay, Amazon, and Overstock) we found the average of the three companies price/sales ratios to be 2.383333333. Multiplying the competitors average price/sale ratio by Etsy’s revenue of sales for 2010, we found its valuation to be 41.06million. 

4)

We used sensitivity analysis to choose which inputs we found most critical in determining Etsy’s valuation. The critical inputs we chose to evaluate are the revenue/member and growth rate inputs for the year 2010. For starters we began with the base for Etsy, which is a revenue/member price of $2.07 and a growth rate of 2%. The total number of members Etsy had at the year of 2010 was 7,000,000 and the total revenue by multiplying the 7,000,000 members to the $2.07 revenue/member price is 14,492,964.80. To do sensitivity analysis we simply changed the revenue/member prices and various growth rates. For example, for the revenue/member price of $2.42 we multiplied the 7,000,000 members by the new revenue/member price and received the new revenue amount if the revenue/member rate would change. To get the new valuation amount we changed the amount of revenue for 2010 to the new revenue biased on the changed revenue/member price and changed the growth rate on the DCF model spreadsheet. With this information established in the chart, it is evident that a higher revenue/member price and growth rate generates the highest valuation. Therefore the amount member the company entails the growth rate are two most critical inputs in our valuation. Larger amount of members generates higher sale revenue. Higher revenue along with higher growth rate entails a higher company valuation.

5)

Looking at the compositions of other companies, I do not think it would be possible to improve the valuation of Etsy very much by adding debt to its capital structure after the acquisition. Ebay and GSI commerce have relatively low debt to equity ratios compared to Amazon and Overstock.com and still have the low tax rates and cost of debt. On the contrary, Amazon and Overstock have relatively high debt to equity ratios, high costs of debt and higher tax rates than the comparable companies. In my opinion, adding debt could improve the value of the company slightly by adding tax shields and bringing down the tax rate but similar companies have shown that too much debt can be a hindrance more than a help in terms of cash flows and value.

6)

Being a relatively new and private company, there is not much financial information in the public to value Etsy. That being said, we were able to obtain several indicators of value and growth including monthly revenue, members, website views, units sold, new items listed and dollar sales from 2008 through 2010. Using this information and information from competitors and companies in Etsy’s industry, we made a fundamental and relative valuation of Etsy. Taking all of our calculations and research into consideration, our firm’s one-time offer to acquire Etsy should be $55 Million dollars. This is in between our relative and fundamental valuation. The reason for this number is the unexpected future growth of the company. It is not realistic for Etsy to continue to grow at the same pace it is growing at and it is hard to predict its future cash flows. Also, there are competitors entering the market such as Artfire.com that has the same business model as Etsy and hopes to take some of its market share.

Question #2 Charts/Graphs :

Averages 3 of competitive company betas equaled 1.56 and used CAPM to get a Re of 0.1214.  Growing perpetuity formula at 2% growth rate and discounted at WACC to receive an NPV of  $71,005,917.16 .