Luxury online retailer, 1stdibs (NASDAQ: DIBS), filed its S-1 registration statement with the Securities and Exchange Commission, as it prepares for its initial public offering (IPO). Terms of the IPO have not yet been issued.
1stdibs operates a two-sided market in which its more than 3.5 million users (defined as both buyers and non-buyers) are matched with its 4,200 expertly vetted sellers, both coming from more than 100 countries around the world. As one would expect of a two-sided market, users and sellers both experience network effects, allowing the firm to grow towards economies of scale and build significant barriers to entry. According to the company’s S-1 filing, the marketplace is designed to capture the “magic” of a “Paris flea market”, in which “collectors, design enthusiasts, and design professionals can shop”, taking advantage of the platform’s vast array of luxury items.
The company has experienced phenomenal growth over the twenty years of its existence. Like a snowball, growth has accelerated in the last decade. In 2013, gross merchant value (GMV) was $13.8 million, rising to $342.6 million at the end of 2020, at a compounded annual growth rate (CAGR) of 58%. GMV has continued to grow substantially. In the first three months of 2020, GMV was $69.3 million, and this has risen to $113.7 million for the first three months of 2021, at a growth rate of 64%.
Revenues have had a similarly impressive growth. In 2019, net revenue was $70.6 million, and rose to $81.9 million in 2020. Revenue has continued on its upward trajectory in 2021. Net revenues for the first three months of 2020 were $17.9 million, and rose to $25.5 million in the first three months of 2021, for a growth rate of 43%.
However, over recent history, the majority of IPOs have been IPOs of unprofitable companies. 1stdibs is one of them. The company is unprofitable, making a net loss of $29.9 million in 2019, and an adjusted EBITDA of -$25 million. Losses narrowed in 2020, going to $12.5 million, with an adjusted EBITDA of -$6.6 million. This pattern has continued in 2021: in the first three months of 2020, the company had a net loss of $6.3 million, alongside an adjusted EBITDA of -$3.2 million; in the first three months of 2021, net loss narrowed to $2.2 million, with an adjusted EBITDA of -$1.3 million.
In order to get on the path to profitability, the company will have to continue to grow revenues while significantly reducing operating costs. The company itself stated that it expects to continue to remain unprofitable and that even if it became profitable, it would struggle to maintain or increase profitability.
The company’s average order value is 24 times the average order value achieved by the typical ecommerce platform or a franchise like Dermani Medspa franchising. At $2,500, it is incredibly impressive, and reflects the company’s focus on luxury goods. It’s an important metric at a time when there is inflationary pressure on the cost of acquiring customers. In 2017, the company spent $252 to create each customer, and the average order value at the time was $1,168. That’s a nearly 500% return.
As with many ecommerce platforms, the global health crisis was rocket fuel for the company. Sales leapt 16 times over the previous year’s numbers, even though the company reduced operating costs by 11%. This explains the narrowing net spread losses experienced by the company in 2020 and the first three months of 2021. The digital transformation of the world and the shift online is part of broader, more secular trends. Covid-19 simply accelerated a pattern that had been forming for many, many years. We can have some confidence that the company will continue to benefit from those secular trends even in a post-pandemic world.
The success of Facebook’s social network and Microsoft’s Windows operating system has created an expectation among investors that momentum driven flywheel of network-effects businesses necessarily lead to economies of scale and massive barriers to entry, a combination which only reinforces and deepens the value of the network. Those expectations run at odds with observations of numerous momentum driven flywheel of network-effects businesses and empirically-grounded research. Research suggests that not all platforms exhibit network effects and that those exhibit network effects do not necessarily enjoy winner-take-all benefits. As phenomenal as 1stdibs’ growth is, it has still failed to attain profitability. This may come at some time, but the overwhelming failure of many platforms to attain profitability suggests that investors should be weary of investing in a business that has not shown it can be profitable. With rivals a click away, the competitive pressures are so high that even a platform as impressive as 1stdibs lacks pricing power. The business model has not proven itself in ways that should give confidence to an investor.