E-commerce platform Etsy (NASDAQ: ETSY) announced on Wednesday that it will acquire Depop, a fashion resale marketplace based in the United Kingdom in a bid to cater to even younger demographics. Investors cheered the news, sending Etsy shares up by 7% as of 1 p.m. EDT on Wednesday. 

Here’s why the market thinks the deal makes a lot of sense.

What is Depop

Depop is a peer-to-peer (P2P) social marketplace that allows users to buy and sell fashion that tends to be more unique. That value proposition mostly lines up with Etsy’s core strength of helping users find more unique handcrafted items than what’s available on larger e-commerce platforms.

It also helps that Depop is putting up incredible growth rates. Gross merchandise sales (GMS) on Depop’s platform doubled in 2020 to $650 million, which helped revenue similarly double to $70 million. The company has 30 million registered users, with 4 million active buyers and 2 million active sellers in 2020. Depop has created a flywheel that is similar to Etsy’s where most (approximately 75%) sellers are also buyers, creating a virtuous cycle of engagement.

The deal is expected to bolster Etsy’s position with the Gen Z demographic, as an estimated 90% of Depop’s users are under the age of 26. These younger consumers are scooping up secondhand fashion faster than any other age group, according to Etsy. In a 2019 report detailing its seller base, Etsy noted that the median age of Etsy sellers is 39, which is relatively young in the context of business owners and entrepreneurs. 

Etsy expects the acquisition to be accretive to revenue growth while modestly diluting the company’s adjusted EBITDA margin. By scooping up Depop, Etsy is expanding its portfolio of brands even further, following the 2019 purchase of Reverb, an online marketplace for vintage musical gear.

Etsy plans to leverage the same strategies that it used to grow Reverb, such as efficient marketing and streamlining backend financial and legal operations. The company notes that it has expanded Reverb’s gross margin by 20 full percentage points since that acquisition, while GMS per marketing dollar spent has jumped from $20 to $27. Etsy hopes that it can do likewise with Depop.

How the deal is structured

Etsy has agreed to pay $1.625 billion, which will consist primarily of cash, although there will be some adjustment for working capital, transaction expense, and net cash acquired. The company has enough liquidity to fund the deal, including $1.8 billion in cash and $200 million available through an untapped revolver at the end of last quarter.

The transaction is expected to close in the third quarter, at which point Depop will continue to operate as an independent marketplace managed by its current leadership team.

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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Etsy. Millennial Money is part of The Motley Fool network. Millennial Money has a disclosure policy.



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