By Amber Burton 

While the year has been a struggle for small businesses, some companies that host their transactions have been soaring.

Shares in Etsy Inc. and Shopify Inc., whose e-commerce platforms primarily cater to small businesses, have surged during the pandemic. Etsy has more than quadrupled this year, while Shopify has tripled.

Analysts remain bullish about prospects for the companies, although their shares are pricey.

Shopify trades at about 350 times analyst expectations for forward earnings, while Etsy's forward multiple is about 90 times. By comparison, tech giants such as Apple Inc. and Amazon.com Inc. trade at about 35 times and 70 times forward earnings, respectively.

The lofty valuations for Etsy and Shopify reflect speculation that sales growth will continue at a brisk pace and that some consumer behaviors that changed during the Covid-19 pandemic will endure. The valuations also reflect a rush by investors to grab shares of all manner of tech firms.

For many small-business owners, the technology platforms have served as a lifeline as their companies shift to a focus on online sales.

Matthew Cummings owns a glass-blowing company that makes custom beer glasses in Knoxville, Tenn. He has been on Etsy since 2012, but didn't move fully online until the pandemic hit and he had to close the doors of his bricks-and-mortar store. He said his Etsy sales are about 10 times higher this year.

Mr. Cummings said that his sales on Etsy have helped him cover his business expenses and that he was able to come out of 2020 with a profit because of his online store. He plans on selling through the platform after the pandemic, with his business now reaching as far as Australia. He has seen a new wave of repeat customers seeking to complete sets of his custom beer glasses.

While Etsy and Shopify used to be more of an occasional place for shoppers seeking unique gifts, the pandemic inspired customers to return multiple times, said Tom Forte, an equity analyst at D.A. Davidson. Both Etsy and Shopify have made concerted efforts to prop up their vendors with resources to reach more customers, according to Mr. Forte.

"If you look at Shopify, it's done well because it's bent over backwards to try to inject them with sales," he said. Shopify has rolled out a variety of new features, including digital gift cards and support for vendors to improve their online stores.

Both companies have kept their pricing competitive during the pandemic. Etsy charges 20 cents per item listed by a vendor and a 5% transaction fee for each sale. Shopify offers tiered monthly plans. The most basic level charges a monthly fee of $29 for sellers and a 2.9% transaction fee.

One type of sale that might not last beyond the pandemic is masks.

Etsy reported that masks accounted for 11% of overall gross-merchandise sales in the third quarter.

Analysts remain upbeat about Etsy and Shopify. Mr. Forte believes sales growth for the first half of 2021 will be good while people wait to receive the Covid-19 vaccine.

The question is whether an end to the pandemic will cool online shopping habits. Any dip in growth could set the shares up for a fall, Mr. Forte said.

Write to Amber Burton at Amber.Burton@wsj.com

 

(END) Dow Jones Newswires

December 23, 2020 05:44 ET (10:44 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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