In this podcast, Motley Fool senior analyst Jim Gillies discusses:
- The strength of Berkshire Hathaway's businesses.
- Warren Buffett's less-than-perfect investing track record.
- Why investors cannot get the exact same price as the Berkshire Hathaway investment managers.
Motley Fool analyst Dylan Lewis and Motley Fool producer Ricky Mulvey engage in a Bull versus Bear debate about e-commerce platform Etsy.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Dec. 22, 2022.
Chris Hill: Just in time for you last-minute shoppers, we've got a Bull versus Bear debate over Etsy, and this one gets a little heated. Motley Fool Money starts now.
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I'm Chris Hill. Joining me is Motley Fool Senior Analyst Jim Gillies. Good to see you. Thanks for being here.
Jim Gillies: Thanks for inviting me, Chris.
Chris Hill: Our email address is [email protected].
We've got a great question from Donna, who writes, "I'm new to investing outside of my 401(k) and I'm planning on keeping my investments long term. What is the downside to following Berkshire Hathaway's 13-F 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."
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 401(k), love that. Starting to invest outside that, that's great. Very much focused on the long term. Love it.
Jim Gillies: There is an easier way I think we're going to...
Chris Hill: I mean, one of my thoughts, what I read this was, God, this sounds tiring. But that's me.
Jim Gillies: Was more of a lot of work that you might not follow through on for too long.
Chris Hill: I'm lazy as an investor by nature. But this is a question that has come up from time to time. It's certainly an idea that's come up. 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."
Jim Gillies: Please don't do this. Please.
Chris Hill: Please don't do this. In terms of the math, though. I mean, directionally, 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.
Jim Gillies: You and me both, Chris. 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 approximately 1/1,500 of 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 be 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 13-Fs and see what's changed quarter to quarter and add, deduct, what needs to be done. It's a lot of work.
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 the 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 Berkshire is more than simply the publicly traded equities. I mean, let's be roughly 50/50. It's 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 13-F and the holdings. But you do get it if you buy Berkshire B-class shares.
Chris Hill: 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 that you just referred to.
Jim Gillies: Correct. Yes. That's kind of what you want. So if you buy the shares, you're getting a piece of Geico, for example. You're getting a piece of Kraft Heinz, I thought that's an investment, that's not. You're getting a piece of Burlington Northern Santa Fe, the railroad, you're getting a piece of MidAmerican Energy. You're getting a piece of Flight Safety of Duracell, of Marmon Holdings, Lubrizol, the ISCAR, I think it used to be called. They've changed the name, which is the metal-tooling, metalworking business they bought 15 years ago or whatever it was. You're going to get a piece of Dairy Queen and a bunch of exciting things like Acme Brick.
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 a bedrock position in her non-401(k) investments -- which I think, by the way, is an excellent idea -- you can just buy B shares and get everything.
The other aspect of this is with the portfolio. Buffett himself will tell you he has made multiple errors over the years. We all make errors. I'm looking forward to making some later today that I don't know about yet. But he invested heavily in IBM, for example, I believe, back in 2012. Didn't go terribly well. Had, I think, 10% 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 airline? Was he taking one for the team? I think you could make a case that's what he was doing. But there's other things that he's famously... like Wells Fargo at one point was the greatest thing ever. Now I think he's completely out of it, so...
Chris Hill: One other thing when Donna asks, what am I missing? One other thing, and it's not that she's missing it, is that anyone would miss it is we don't know exactly what the price is. You can look at Berkshire Hathaway 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 kind of get the same price. You can do exactly what Donna has laid out here. You might do OK for yourself. You're not getting the same price. You're not getting exactly the same price that Berkshire Hathaway is.
Jim Gillies: Well, because you know about it at best, what, 45 days after quarter-end? If he made the move and say, like the most recent 13-F is as of what's showing the holdings, the filing that they are required to show. That was filed on, I believe, November 15 for a quarter that ended September 30th. Maybe the move was made in the middle of August. Like your trailing, whereas you get whatever perceived benefit there is, you get it from buying and holding the shares, Berkshire shares, that is.
Like I said, again, it might be a point to brag that "I own an A share." -- I do not own an A share, by the way. -- But it might be a point to brag about, well, "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 sell it to convert yourself.
But no. 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. 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. You'll get the benefit of all the portfolio moves in real time, in theory, in real time, just by owning the shares. That's the longest-winded answer to say "Buy Berkshire."
Chris Hill: Keep the email questions coming, [email protected]. Jim Gillies, Thanks so much for being here.
Jim Gillies: Thank you.
Chris Hill: 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 2022. Can Etsy rebound from its post-pandemic slog. Dylan Lewis and Ricky Mulvey duke it out in today's Bull versus Bear.
It's 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.
Dylan Lewis: Happy to be dragooned with Ricky Mulvey.
Chris Hill: Making the bear case for Etsy is the guy who normally hosts this segment. It's Ricky Mulvey.
Rick Mulvey: Hey, thanks for having me.
Chris Hill: You didn't have a choice. Dylan, you've got five minutes to make the bull case for Etsy. Go for it.
Dylan Lewis: Well, we could not be having this conversation at a better time for me to make my bull argument, because it is the holiday season. 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 Ickey 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 2022. They're off the peak of the pandemic, when money is a little bit more plentiful, consumer spending was 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 3xed since 2019, and they've been able to bring a lot of shoppers over with that activity. They now account 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 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.
We have more people onsite, 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 favorite or watch an item on Etsy, they offer 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 enthusiast 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 allows 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 valuation, 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 after my pitch, check it out as you're doing your holiday shopping. It can save you a lot of time.
Chris Hill: I've also done some shopping, and Ricky, don't let this bias you, but I'm also a shareholder. Your rebuttal.
Rick Mulvey: 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 multilevel marketing companies, patio furniture, and Pokémon cards. Don't Google "thick charts art" on there.
Yes, Etsy has more than tripled its number 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 EcommerceBytes, 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, Depop for $1.5 billion and Elo7 for $212 million. Depop is a resale platform. Elo7 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 write-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."
Resales are 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 when 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 devaluation: Right now, Etsy is down by 40% year to date, but that's not cheap. The platform is trading at a 6.5 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 is prudently as it could. 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.
Chris Hill: 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. 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.
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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 interest 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' Mo'.
