Was Etsy's Artificial Intelligence Acquisition a Smart Move?

By Markets Fool.com

On Sept. 19, Etsy (NASDAQ: ETSY) announced it had acquired private analytics and AI company Blackbird Technologies to enhance its search capabilities. Since Etsy is an online retailer of rare products and handmade crafts, though, some might question the prudence of its purchase.

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Details of the transaction

Etsy bought Blackbird Technologies for an undisclosed sum of money. What we do know is what the company gets in theexchange: Blackbird's analytics engine that analyzes shoppers' behavior to predict and suggest personalized search results, image recognition and cataloguing to enhance user searches, and spelling correction and predictive type to speed up the search process.

In addition to the technology, the techie team at Blackbird will also be joining Etsy, including the two company co-founders. Etsy believes that the team and the technology they have developed will eventually be used in other areas of business outside of search. For example, the AI could be applied to Etsy's seller services program, which at last report accounted for 58% of the online marketplace's revenue.

Image source: Etsy.

How the deal complements Etsy's strategy

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Etsy's buyer and seller community has grown to have 40 million unique item listings for sale. On the buyer side, the company says users go to the site to find products that they can't find anywhere else. This unique market gives the online merchant a leg up on competition that competes on lowest price and fastest shipping. The company hopes this personalized and more human approach helps Etsy -- and the sellers who use the service -- stand out from other online sellers like Amazon (NASDAQ: AMZN) and traditional retailers like Wal-Mart (NYSE: WMT).

While the Etsy strategy in the past has been helping small craftworkers and vintage collectors connect with consumers, the company has transitioned into making the shopping experience as simple as possible. One of the ways they've done this is by optimizing the site for both desktop and mobile users. They've seen better sale conversion rates as a result.

As the company's community has grown, though, searching for that unique item or artist who can make it has become a more daunting task. The marketplace has also expanded beyond the borders of the U.S., making the search that much more cumbersome. This is where the Blackbird AI comes in.

For example, during the last conference call before the Blackbird Technology announcement, Etsy CEO Chad Dickerson talked about enhancements around search capabilities to drive growth. These enhancements were aimed at raising awareness of the site as a go-to destination for consumer needs, helping active buyers filter through the millions of unique listings, and encouraging the 53% of buyers who made only one purchase during 2015 to come back to the site again.

Viewed in this light, the purchase of Blackbird Technologies makes sense. With Etsy's goal of helping people rethink global commerce and emphasis on selling unique items to help people express their individuality, the artificial intelligence capabilities complement what the boutique vendor is aiming for.

Was the purchase worth it?

Even though we don't know the specifics on how the buyout was made, Etsy's AI addition looks like it could be worth it. The online marketplace's revenue is up 39% year to date over 2015, totaling $167.2 million. And while the company is not yet profitable, it is nearing that mark, with year-to-date losses slimming down to $6.1 million at last report. Helping a growing base of users search through a massive library of products is a logical step to continued sales and bottom-line growth.

Deal specifics unknown, one could still argue that Etsy didn't splurge or try to go too big. Blackbird is a new start-up, with the company's LinkedIn page claiming 11 to 50 employees and only eight employee profiles showing up in search. The ultimate test, though, will be to see if the addition helps the company convert "window shoppers" into new paying customers in the quarters ahead. Given the Etsy strategy, it probably will help.

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Nicholas Rossolillo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool owns shares of Etsy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.