Description

1stDibs (DIBS) is an under-the-radar stock. The company is an online marketplace for luxury design products poised to become a category leader. It has not been an auspicious start for the new issue, with the stock down 40% since its IPO in June. As DIBS rolls out new initiatives, such as auction, NFT and localization, we believe the company should re-accelerate growth to 25%+ over the next several years. With 70%+ gross margins and low fixed costs, DIBS has an operating model that should scale nicely with strong profitability. CEO David Rosenblatt owns a significant amount of stock and recently bought on the open market. He was the CEO at DoubleClick when it was sold to Google for $3.1 billion. He currently serves on the boards of Farfetch, IAC and Twitter. We believe the downside is low as the marketplace model is attractive to both strategic and financial buyers. We see upside of $20-24/share at 4-5x 2023 revenue and downside of $10/share at 2x 2022 revenue.

Why does this opportunity exist?

·       Broken IPO: DIBS’s stock price has fallen 40% since its IPO in June 2021. The company didn’t help itself when it gave disappointing guidance on its first earnings call in August, citing slower-than-anticipated GMV growth as consumers shifted to in-person shopping post COVID lockdown.

·       Small cap with low float: DIBS has a market cap of $500 million and issued just 5.8 million shares in the IPO. With low market cap and float, DIBS is unable to attract larger institutional investors.

·       Transition in business model: Prior to 2016, DIBS operated mostly as a listings site where merchants paid fixed listing fees. The company shifted to a full e-commerce marketplace in 2016 where merchants paid a percentage of gross merchandise value (GMV). However, the transition was a long process and a headwind to growth. DIBS had to convince merchants to pay not only a commission on sales but also an annual subscription fee. The transition also impeded the company’s effort to roll out new growth initiatives until recently.

·       Not profitable: DIBS has reported negative EBITDA as it focuses on driving GMV growth, though it was near breakeven in the second half of 2020.

·       COVID beneficiary: DIBS’s GMV growth accelerated during COVID in 2020 as consumers shopped online. Now it faces tough comp as COVID-driven growth wanes.

Company background

DIBS was founded in 2000 as a listings site for top vintage and antique furniture sellers. The company launched its e-commerce platform in 2013 and transitioned to a full e-commerce marketplace model in 2016. CEO David Rosenblatt joined in November 2011 after serving as President of Global Display Advertising at Google and CEO of DoubleClick before its sale to Google. Today, DIBS operates an e-commerce marketplace with approximately 4,200 seller accounts located across 55 countries, 3.5 million users, just under $500 million in annual GMV, and a seller stock value greater than $10.9 billion. The company had its IPO in June 2021, issuing 5.8 million shares at $20 per share.

Business model

Approximately 75-80% of DIBS revenue comes from transactional/commission fees in the range of 5-50%, though the standard take rate is 15%. Approximately 20-25% of total revenue comes from non-transactional fees, of which the vast majority are subscription fees with rates that vary by product category and geography. The subscription fees range from a couple of hundred to a couple of thousand dollars per month per product category. The remainder of non-transactional revenue is listing fees, which sellers can pay to participate in promoted listings. This is a smaller piece of the overall revenue. Going forward, DIBS plans to shift more towards transactional fees by giving new sellers a greater choice of fixed and variable options.

Approximately 50% of GMV comes from vintage & antique furniture. The other 50% is comprised of jewelry, art, fashion, and new & custom furniture. About 85% of the goods sold on DIBS are secondary. Therefore, DIBS has seen limited impact from supply chain issues plaguing other e-commerce companies.

Competitive landscape

We believe DIBS is an emerging leader in the online marketplace for luxury design products. Though it has few direct competitors, DIBS faces competition from traditional brick-and-mortar entities, such as department stores, branded luxury goods stores, and specialty retailers, and entities providing access to more unique luxury goods, such as galleries, boutiques, and auction houses. In the online space, DIBS competes against vertical players, such as Chairish in furniture and Artsy in arts, and other online specialists, such as LiveActioneers and RealReal (REAL).

1stDibs’ competitive advantages

DIBS operates a two-side marketplace, connecting sellers and buyers. The majority of sellers are small businesses and makers of vintage, antique, contemporary furniture, home decor, jewelry, watches, art, and fashion. Buyers include both consumers (design-focused customers and collectors) and trade businesses (interior designers). As with other marketplace models such as eBay and Etsy, DIBS benefits from powerful network effects as GMV grows.

DIBS offers a strong value proposition to both buyers and sellers on its platform. For buyers, DIBS has created a trusted brand for online luxury purchases, with average order value around $2,500. Unlike many other marketplaces, DIBS provides a curated selection of products from authenticated sellers, with a comprehensive buyer protection program and dedicated customer support (e.g., product returns, experts on standby, loyalty discount program).

For sellers, DIBS enables small businesses to easily bring their luxury items online. Many of these sellers do not have e-commerce storefronts or a robust reputation to attract online buyers on their own. With DIBS, they have immediate access to over 3.5 million users and 70K+ active buyers who transacted during the previous 12 months.  One of the art dealers we spoke to commented that DIBS had a strong reputation among dealers and interior designers and that no one had captured the designer base like DIBS.

Multiple growth initiatives

To maintain the flywheel effect of a marketplace model, DIBS must drive growth in both supply and demand, and increase the conversion rate of its user traffic. The process of transitioning its model from listing to full e-commerce took a toll DIBS’ new product development efforts in the past. But now the company has hit its stride with several growth initiatives:

·       Additional product categories: DIBS started as a vintage and antique site and has since expanded into fashion, jewelry, art and new & custom furniture. GMV from newer categories is growing faster than vintage/antique and is now 50% of total GMV. In August, DIBS launched NFTs and, while early, generated average transaction value in the $4,500 to $9,000 range. We expect DIBS to expand into additional luxury categories, such as wine.

·       Auctions: DIBS discovered one obstacle to buyer conversion was price discovery because the luxury products on the DIBS platform tended to be unique and high-priced. In November, DIBS launched Auctions to offer additional formats for buyers and sellers to transact. We believe Auctions should drive increased conversion and GMV growth.

·       Localization: Even though DIBS does not offer local language sites today, approximately 40% of supply on its online marketplace comes from outside the U.S., 30% of its 3.5 million users are international and 20% of buyers are located internationally. DIBS believes launching localized products will improve conversion for non-U.S. buyers over time. The company plans to have local language product in the first half of 2022, initially targeting Western Europe.

High operating leverage model

As an asset-lite marketplace, DIBS has 70%+ gross margins and should continue to scale nicely as GMV grows.  For comparison, Etsy achieved 20% EBITDA margins when revenue hit $500 million. Today, DIBS is sub-scale and unprofitable as the company invests for growth, although they nearly broke-even in late 2020 when GMV surged.  The CEO has told us that the company could be profitable if it wanted because a significant portion of its costs are variable.

CEO alignment

CEO David Rosenblatt owns over 2.1 million shares (6% of total shares outstanding). He bought 100K shares in August at an average price of $14.94 and another 22.5K shares in November at an average price of $13.37. We are confident that David has the experience to drive growth or position the company for an eventual sale. As the CEO of DoubleClick, he re-accelerated growth in the aftermath of the Dotcom bust and positioned the company as an attractive acquisition target for Google in 2007. One could argue that David may be over-qualified for a small cap company with just $100 million in revenue, given his experience at DoubleClick/Google and current board seats at Farfetch, IAC and Twitter.

Valuation

DIBS currently trades at 3x 2021 revenue of $104 million (+26% year-over-year). We forecast 2022 growth of 20%, followed by 25% in 2022.  Our forecasts are higher than those of consensus (+15% in 2022 and +20% in 2023) because we believe growth initiatives should kick in next year and drive above-consensus numbers. 2022 growth is expected to be lower than 2021 due to tougher COVID compares in the first half of 2022.

As for comparable multiples, Etsy (ETSY) currently trades at 10x 2022 revenue. On the low end, Poshmark (POSH) trades at 2x and RealReal (REAL) at 1.5x 2022 revenue. On the one hand, we do not believe DIBS should trade at a comparable multiple to ETSY, which deserves a significant premium given growth, scale and profitability. On the other hand, we also do not believe DIBS should trade as low as POSH or REAL. POSH is a mass market, secondhand marketplace that has missed multiple quarters in a row. REAL has a less appealing model than DIBS, with material revenue from directly held product/inventory and higher labor/CAPEX costs. They are also burning substantial amount of cash.

We value DIBS somewhere between ETSY and POSH/REAL. We see an upside case for DIBS at $20-24/share, or 4-5x 2023, as it reaccelerates growth in the second half of 2022. We see downside at $10/share, or 2x 2022 revenue if growth does not accelerate and investors put it in the POSH/REAL category.

Risks

Limited mass appeal: DIBS sizes its global market opportunity at over $300 billion, which includes high-quality design furniture, homeware, fine art, watches, jewelry and other adjacent personal luxury goods like footwear, leather goods, apparel, and beauty. However, DIBS focuses on e-commerce transactions and primarily secondary sales. Even as DIBS expands into categories such as new/custom furniture, the marketplace may still be limited in its appeal.

Potential for offline transactions: Some buyers and sellers may connect on DIBS and subsequently transact off-platform to avoid paying the company a commission. However, DIBS has strict policies to deter offline communication/transactions and may kick sellers off the platform if they’re found to be violating policies. Some sellers have told us that prior to an actual sale they are unknown to buyers and would therefore have a difficult time convincing them to take large transactions offline.

Catalyst

Growth acceleration from new initiatives: new product categories, auction, localization