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Etsy Doesn't Make the Items on Its Marketplace. This Is Its Product.

Online marketplace Etsy (NASDAQ: ETSY) has become the go-to destination for unique, handcrafted products. But sometimes, investors forget that Etsy doesn't make them. Rather, it simply provides the marketplace where independent sellers can market their products.

In other words, Etsy doesn't provide niche products -- it provides a marketplace. However, in this video from Motley Fool Backstage Pass, recorded on Oct. 5, Motley Fool contributor Jason Hall explains that Etsy's real products are actually its buyers -- you and me.

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Jason Hall: Now, I'm going to talk about Etsy because I think there's also some of this too, and guys, for some of the same reasons that we were talking about with the other companies here, in that there is an ad-revenue component that Etsy is able to tap into, especially with some of their bigger sellers that are paying for ad space, and also paying for ad space off of the Etsy platform, so [that] helps drive more traffic.

But the other part of it, too, is that the shoppers that go on Etsy's website are also the product for another really important cohort for Etsy in terms of customers, and that's Etsy's sellers. It must have a great product for those sellers that are wanting to sell on Etsy's platform, so managing that is really important. This is one of the reasons why the company -- I'm going to do a screen share here -- reports a metric that you'll hear with a lot of these companies. That's gross merchandise volume or gross merchandise sales, which is the total revenue that carries across this platform. Now, it only keeps a portion of that because Etsy sellers are selling the product to buyers, and Etsy keeps a take of that. Sometimes you hear the term "take rate," which is the percentage of the sale that Etsy retains, and then when it reports revenue, that's what it's reporting, versus Amazon or Target or one of these companies that the revenue that they're reporting is largely products that they're selling directly to their customers.

Etsy's business model is facilitating that transaction, which means that to a large extent, you the shopper, you're part of the product. The product that you are buying, it's a product to you, but it's not necessarily the product that Etsy is trying to sell. Etsy's trying to sell you.

Again, I think the key to me is, Etsy is a business that is very aligned in its business with both its buyers and its sellers, and a lot like Pinterest, because it has to facilitate a process that's comfortable. People need to find what they're looking for. If you're looking to buy something, you need to find that unique product on Etsy that you can't necessarily find from another retailer. If you're a seller making a unique product that maybe is in a niche, you want to have access to as large a potential market of people as buyers as you possibly can, and Etsy is becoming dominantly that platform, not just with its Etsy brand, but you get outside of the U.S. -- Brazil, it's made a recent acquisition that is dominant in Brazil and it could continue to grow in other parts of Latin America. You think about used clothing -- there's a really interesting growth market there that Etsy has a really big business in. They've recently acquired a business Reverb, maybe a year or so ago, for used [musical] instruments.

There are all of these different things they are doing that give the business a lot of optionality. But again, the core business is you as an Etsy buyer from an Etsy seller, you're actually the product.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jason Hall owns shares of Etsy and Pinterest. Jon Quast owns shares of Etsy and Pinterest. The Motley Fool owns shares of and recommends Amazon, Etsy, and Pinterest. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.


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