Motley Fool Money - Following Buffett, Bull vs. Bear: Etsy

Episode Date: December 22, 2022

What's the downside to using public filings to mirror Berkshire-Hathaway's investments? (0:21) Jim Gillies discusses: - The strength of Berkshire-Hathaway's underlying businesses - Warren Buffett's less-than-perfect investing track record - How investors cannot get the exact same price as the Berkshire-Hathaway investment managers (10:20) Dylan Lewis and Ricky Mulvey engage in a bull vs. bear debate over e-commerce platform Etsy. Stocks mentioned: BRK.A, BRK.B, ETSY, EBAY Holiday Music: Merry, Merry Christmas by Keb’ Mo’ Host: Chris Hill Guests: Jim Gillies, Dylan Lewis Producer: Ricky Mulvey Engineers: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode is brought to you by KolaGard. Do you know what's really scary? Not screening for colon cancer when you turn 45. The Koloard test is non-invasive, requires no special prep or time off work, and ships right to your door. In just three simple steps, KolaGar takes the scare out of colon cancer screening. If you're 45 or older and at average risk, ask your health care provider about the KoloGard test. KoloGuard is available by prescription only. Learn more or request a prescription today at KolaGar.com slash screen. Just in time for you last minute shoppers, we've got a bowl versus bear debate over Etsy, and this one gets a little heated.

Motley Fool Money starts now. I'm Chris Hill. Joining me is Motley Fool Senior Enlist Jim Gillies. Good to see you. Thanks for being here. Thanks for inviting me, Chris. Our email address is Podcasts at Fool.com. We've got a great question from Donna, who writes,

I'm new to investing outside of my 401k, and I'm planning on keeping my investments long term. What is the downside to following Berkshire Hathaway's 13F filings, investing in similar percentages and rebalancing the investments once Berkshire Hathaway's quarterly reports are released? Warren Buffett is a long-term investor, and the Class A shares are so expensive. I'm thinking if I invest similar percentages in Berkshire's top 20 investments and rebalance quarterly, I could come out better than investing the same amount of money in a Berkshire Hathaway Class A share, fractional, of course. I don't see a downside, but I know there is one. Otherwise, everyone would do this, right? What am I missing? Thanks. Okay. First of all, Jim, shout out to Donna,

because I love the way Donna is thinking and I love the way Donna's investing. She's got the 401K. Love that. Starting to invest outside that. That's great. Very much focused on the long term. Love it. However. an easier way, I think we're going to. Well, I mean, one of my thoughts when I read this was, God, this sounds tiring. It sounds like a lot of work that you might not follow through on for too long. And I'm lazy as an investor by nature. But, you know, this is a question that has come up from time to time. It's certainly an idea that's come up. And I believe there have been people who have asked some version of this question to Buffett and Munger at the Berkshire

Hathaway annual meeting. Buffett himself is usually the first to say, don't follow me blindly. Please don't do this. In terms of the math, though, I mean, direction in this makes sense, but it just seems like with Class B shares, which are far less expensive. on a dollar basis than Class A shares. Let me put it this way. When I went to buy shares of Berkshire Hathaway, I bought the B shares. You and me both, Chris. I have owned, I have B shares that are older than my children, and I have a kid in university. So that should tell you all you want to know there. The B shares, which are a approximately 1,500th value of the A shares. They are functionally equivalent just with

that size differential. Donna, I would suggest you buy, rather than buying the A class shares or being worried about buying a class A share, I would just go with the B shares, which are ticker BRK.B on the New York Stock Exchange. The reason I would do that rather than your proposal here. And I agree with Chris. It's an interesting idea, but it's a lot of work. You're going to have to pull the 13Fs and see what's changed, quarter to quarter, and add, the deduct, what needs to be done. It's a lot of work. And the thing is, that is not what Berkshire Hathaway actually is. It's part of what Berkshire Hathaway is. You get Buffett, his investing acumen. More commonly nowadays, especially with smaller positions, it's not Buffett at all. It's

Todd or Ted, as they say, the investing lieutenants who will be there once Buffett hangs it up. But, you know, Berkshire is more than simply the publicly traded equities. I mean, let's say, let's be roughly 50-50, right? You know, half the equities, but also there's this whole realm of business on the side that you don't get if you're just emulating the 13F and the holdings. But you do get it if you buy Berkshire B-class shares. And there certainly have been times when you look at the overall performance of Berkshire Hathaway. There have certainly been times when the investment portfolio has carried the day.

There are plenty of times when it's the operational businesses underneath you just referred to. Correct. Yes. And that's kind of what you want. So you're getting, if you buy the shares, you're getting a piece of Geico, for example. You're getting a piece of, well, I'm looking at a piece of Kraft Heinz, although is that an investment that's not.

You're getting a piece of Burlington, Northern, Santa Fe, the Railroad. You're getting a piece of Mid-American Energy. You're getting a piece of flight safety, of Duracel, of Marmon Holdings, Lubrasol, the Iscar, I think it used to be called. They've changed the name, which is a piece. the metal tooling, metalworking business they bought 15 years ago or whatever it was. You're getting a piece of Dairy Queen and a bunch of exciting things like Acme Brick. Okay, I laugh, but no, I mean, you're getting all of these operating businesses that, as you say, Chris, have from time to time carried the day.

And if Donna is looking to Berkshire as kind of a bedrock position in her non-401K investments, which I think, by the way, is an excellent idea, you know, you can just, you know, buy B shares and get kind of everything. The other aspect of this is with the portfolio, Buffett himself will tell you he has made multiple errors over the years. Now, he's, he's, you. And we all make errors, right? I'm looking forward to making some later today that I don't know about yet. But like, you know, he invested heavily in IBM, for example, I believe back in 2012. Didn't go terribly well. Had all, I think, 10 percent positions in the big four U.S. Airlines pretty much bottom-ticked it during the pandemic. Now, was he selling because

He was scared or was he selling to get out of the way because it wouldn't look good for the U.S. government to bail out Warren Buffett backed airlines. So was he kind of taken one for the team? I think you could make a case. That's what he was doing. But you know, like there's other things that he's kind of famously, like Wells Fargo at one point was the greatest thing ever. And now I think he's completely out.

So. Well, and one other thing, when, you know, when Donna asked what am I missing, one other thing, And it's not that she's missing it, it's that anyone would miss it, is we don't know exactly what the price is. Like, you can look at Berkshire Hathaway, you know, in a filing. Berkshire Hathaway bought X number of shares of this company and Y number of shares of that company. We don't know, was that all in one chunk?

What is the price point along the way? And invariably, you're not going to get the same price. Like, you can do exactly what Donna has laid out here. You might do okay for yourself. You're not getting the same price. You're not getting exactly the same price that Berkshire Hathaway is. Well, because you know about it at best, what, 45 days after quarter ends? So if he made the move and say, like the most recent 13F is as of what's showing the holdings,

the filing that they are required to show. That was filed on, I believe, November 15th for a quarter that ended September 30th. the move was made in the middle of August. You're trailing, you know, whereas you get whatever perceived benefit there is, you get it from buying and holding the shares. So that, of Berkshire shares, that is. And like I said, again, you know, it might be a point to brag that, you know, I own an A share. I do not own an A share, by the way. But, you know, it might be a point to brag about, well, you know, I own A shares. That's nice. The B shares are fine. If you buy 1,500 B shares, I think you can convert it to an A or you can always sell

it, convert it yourself. But no, to me, to me, owning Berkshire, the B shares or the A shares, regardless, owning Berkshire is a core bedrock position, I think appropriate for pretty much every portfolio. So kudos to Donna for recognizing that. But I think what you're missing is, you're missing the operating businesses if you don't own the shares and you'll get the benefits. of all the portfolio moves in real time, in theory, in real time, just by owning the shares. So that's the longest winded answer to say, buy Berkshire. Keep the email questions coming. Podcasts at Fool.com, Jim Gillies.

Thanks so much for being here. Thank you. If you're done with your holiday shopping, there's a chance you visited Etsy, the e-commerce marketplace focused on handmade and vintage goods. And like a lot of businesses, the stock has had a rough 20, Can Etsy rebound from its post-pandemic slog? Dylan Lewis and Ricky Mulvey duke it out in today's Bull versus Bear. Time for Bull versus Bear.

We pick a company, Dragoon two colleagues into doing some research, flip a coin, and then see which side they get to take. The company up for debate is Etsy, the e-commerce platform, whose shares are down 40% year-to-date. Making the bull case will be Dylan Lewis. Dylan, thanks for being here. Happy to be dragooned with Ricky Mulvey. And making the bear case for Etsy is the guy who normally host this segment. It's Ricky Mulvey.

Hey, thanks for having me. You didn't have a choice. All right, Dylan, you've got five minutes to make the bull case for Etsy. Go for it. Well, we could not be having this conversation at a better time for me to make my bowl argument because it is the holiday season. And really, this is the time where Etsy's value absolutely shines. This is the place for craft and personalized gifts.

Now, say you have a Cincinnati Bengals fan on your wish list, who's also a coffee drinker. There is an Etsy seller with an icky shuffle coffee mug for sale right now. You can buy it. That's right, Ricky. Really, Etsy is the home for craft, personalized, and independent items. If you are doing your holiday shopping or getting a gift for someone's birthday, it almost feels like a cheat code. If you go to their homepage right now, you're met with a widget to help you find gifts for whoever you may be shopping for, different categories of relationships you have in your life. Now, this is a company that had a massive growth and adoption cycle during the pandemic.

And as Chris mentioned, we're seeing a little bit of a come down from that in 2020. They're off the peaks of the pandemic when money was a little bit more plentiful, consumer spending was a little bit higher and growth stocks were being rewarded. But I think during the period of the pandemic, when they saw that adoption, they were able to bring a lot of customers on board and will set them up for good long-term success. The company's revenue base basically three X since 2019. And they've been able to bring a lot of shoppers over with that activity. They now count 88 million people who have bought an item on the site in the last 12 months,

and we are seeing good repeat purchase behavior. Repeat buyers are up 49% from 41% in 2019, and habitual buyers are up 7.6 million from 2 million in 2019. We're also seeing the average ticket increase over the past few years. Average annual spend per user is up 30% since 2019. So we have more people on site, more people making repeat purchases, and the overall size of those purchases increasing over time. Those are all growth levers working together that can help meaningfully grow revenue,

especially as we get into a more favorable economic period. And Etsy's take rate has also improved. They're taking more from every transaction that happens on the platform. I do think the company has some other good growth drivers ahead of it. They're continuing to build out tools and resources for shoppers. You'll notice if you favor it or watch an item on Etsy, we offered a coupon code to help stir some activity from some sellers. They're going to see more innovation in that zone.

And I think we're also going to see them continue to build out their ads business and see what other monetization opportunities there might be. I think a good mid-case for Etsy would be to become something the scope of eBay, which does $10 billion in revenue. Etsy is currently a quarter of that. I mentioned 7.6 million habitual buyers. eBay has 17 million enthusiasts buyers. I see upside in customers and activity for Etsy, and I think they make it easier for merchants to build a true storefront, which may steal some activity from eBay. The two businesses get at something similar, odd items, crafts, collectibles, but Etsy does it without the unpredictability of the auction. marketplace and allow sellers to build more consistent businesses and online presence.

I think the next year or two might be a little bit bumpy for this company, but we are seeing this business at a much more reasonable evaluation around $15 billion, and the business has a proven track record of profitability. I have a small position. I'm a shareholder. And even if you weren't compelled to buy the stock for my pitch, check it out as you're doing your holiday shopping. It can save you a lot of time. I've also done some shopping. And Ricky, don't let this bias you, but I'm also a shareholder.

a shareholder. Your rebuttal. Well, a popular product doesn't always make a good stock. I'm glad both of you are doing some shopping there, and I think that's the case for Etsy. The platform can be great for buyers. I have some go-to gifts from the website, but it's become more like a digital flea market. It's not just personalized cutting boards and handmade jewelry. Now it's products from multi-level marketing companies, patio furniture, and Pokemon cards. Don't Google Thick Charzart on there. Yes, Etsy has more than tripled its numbers of sellers over the pandemic, and that's led to a platform that could have used some curation and smarter growth. Etsy is nothing without its sellers, and the platform can be a difficult place to do business. Listings are taken down without a reason,

leaving sellers to figure out what rules they broke through a web of customer support confusion. Sellers have also complained that Etsy's Star Seller program has serious flaws. Just one small example is that a seller complained to the website, e-commerce bytes, that they had a buyer who sent three rapid-fire messages quickly to them. They responded to the last message, and they were penalized for not responding to all three. Remember, Etsy's mission is to keep human connection at the heart of commerce. Additionally, the platform does not offer any order fulfillment services, such as inventory storage, order picking, and packing.

Yes, this makes for a prettier balance sheet, but it also makes switching costs lower if sellers want to move to Amazon handmade or Shopify or a competitor we don't know about yet. The business is automating relationships with sellers and throwing its hands up for shipping support. It leaves the door open to competitors, who are going to do that heavy lifting. This brings us to a bigger problem,

which is that the management team has not proven to allocate capital well. Etsy bought two other online retailers in 2021, D-pop for 1.5 billion, and ELO7 for 212 million. D-pop is a resale platform. Elo-7 is like a Brazilian version of Etsy. And in Etsy's latest quarter,

the company wrote down these acquisitions by $1 billion. Chief Financial Officer Rachel Glasser blamed this right down on the Fed hiking, interest rates, reopening headwinds, inflationary factors, consumer discretionary spending trends. Oh, by the way, Poshmark just went private for less than half of its IPO value, so the problem could be worse.

CEO Josh Silverman simply said, our timing on those acquisitions certainly could have been better. Resale is a notoriously expensive business, no matter your market climate. You've got to authenticate products, and that can be expensive. If you're a long-term shareholder, you've got to be concerned about management taking a $1 billion charge with little to no self-reflection. To quote basketball great Charles Barkley, quit crying about getting hacked or how your shoes hurt or how you can't shoot outdoors. Just shut up and jam. These expensive acquisitions mean that Etsy's shareholder equity is worth negative 600 million bucks. Negative shareholder equity is what a company owes more money to investors

than its assets can cover. This company hasn't been through a major recession. And sales growth may slow even further if we enter one. Etsy doesn't have those gale force. tailwinds at its back from the pandemic. On to valuation. Right now, Etsy is down by 40% year-to-date, but that's not cheap. The platform is trading at a six and a half price-to-sales ratio. Hey, how about eBay at a 2.4 price to sales? Plus, they'll pay you a small dividend. I hear that can make management a little bit smarter about how they spend your money. Etsy's also spent more than 166 million in stock-based comp through the first nine months of 2022. That's up 85% last year. Yes, Etsy offset dilution with buybacks, and it's because the company grew headcount, but in its latest quarter,

Etsy spent more on stock-based comp than marketing or product development, and that does not signal that Etsy is investing in the business as prudently as it could. And while the company is bazooka-blasting its exec team with stock, insiders have made exactly zero open market buys over the past 12 months. Ouch, my bottom line, Etsy is still an expensive pandemic play with a management team that refuses to learn capital allocation lessons and, learn from its mistakes. Ricky Mulvey, thank you for the bear case. Dylan Lewis, thank you for the Bull case.

And listeners, you get to decide who made the better argument. Vote on Twitter at Motley Fool Money. And what will one of these guys win? Today's lucky winner will receive an airbrushed t-shirt. This Etsy seller has been airbrushing t-shirts for just under a month, and he's ready to show you what he's got. You won't need to introduce yourself when wearing a new shirt displaying your name printed in cool graffiti letters. And hey, if you're looking to share

even more, don't worry. He can also airbrush your astrological sign, gamer tag, or select Disney characters. Just make sure to complete your order before a cease and desist letter hits his mailbox. This fabulous prize could be yours if you win. Bold versus Fair. Quick programming note. This Saturday, Christmas Eve, we have another Apropos of Nothing episode to get you through your last minute shopping and travels. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill.

Thanks for listening. Until tomorrow, here's the great Keb Moe.