Etsy/Party City: Fancy dress

Fancy dress party this weekend? You could find the perfect costume online, or pick up your outfit at a megastore. Shareholders faced a similar choice this week as Etsy and Party City went public. The companies sell some similar items, but their debuts were starkly different. Etsy's share price doubled on day one, closing with an enterprise value of $3bn, 16 times last year's sales. Party City rose 20 per cent on day one but closed the day worth $4.25bn - less than twice sales.

Party City suffers from being a classic bricks-and-mortar business, with 900 stores in North America. Its growth strategy is to build 350 more. Sales have grown by 9 per cent annually for the past four years, helped by debt-fuelled expansion. After several years of private equity ownership, it carries $2.2bn in debt. Running retail stores is expensive: cost of sales were 60 per cent of revenues last year. And funny hats and balloons are low-margin items.

Etsy, by contrast, is an exemplar of the 2015 tech bubble: rapid growth and no profits in sight. It has the advantage of being an online marketplace with a relatively low cost of sales. It charges sellers to list their items, and takes a small commission. Gross margins were more than 60 per cent last year.

The market is equally dizzy about both companies. Party City trades at 24 times earnings (other brick-and-mortar retailers like Macy's and Target trade at around 18 times). Etsy's 16 times sales also looks wildly steep (eBay trades at four times sales). Dress up is a fun game, but the costume has to come off sometime.

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