Not that long ago, Etsy (NASDAQ: ETSY) was one of the top companies that investors could have owned. From the pandemic low in March 2020 to their all-time high in November 2021, shares skyrocketed 837%.
But slowing growth and the market’s disdain for growth tech stocks pressured investor sentiment. Etsy currently trades 81% below its peak price. But it’s still a smart buying opportunity right now.
Zoom in
Etsy’s growth was through the roof in 2020 and 2021. The company was adding buyers and sellers to its platform. Its gross merchandise sales (GMS) were soaring. Demand was very strong.
However, the normalization of consumer behavior, with people starting to leave their homes to shop again, created the perfect headwind for Etsy. It also didn’t help that inflation started to rear its ugly head about three years ago.
The slowdown has continued. In the most recent quarter (Q2 2024, ended June 30), Etsy posted a 2.1% year-over-year GMS decline. That figure was slightly lower than in the same period three years before. It makes sense that consumers are pulling back on discretionary spending when it seems like the price of everything has gone up in the past couple of years.
GMS is expected to fall again in the current quarter.
Zoom out
It’s understandable for investors to get caught up in quarterly financial figures. But if you’re a long-term stock market participant, then it’s always best to zoom out and focus on the bigger picture. With this perspective, it’s easy to still have a favorable view of Etsy’s business.
The company is truly differentiating itself. There are wide product assortments in various categories, like home furnishings, apparel, jewelry, and craft supplies tailored to specific needs. According to a survey, 83% of buyers agreed that Etsy sold items that they couldn’t find anywhere else.
The retail sector broadly, and the e-commerce niche specifically, is hyper-competitive. All companies operating in the industry must constantly worry about Amazon‘s presence. But while the tech titan thrives when it comes to mass-produced goods and fast shipping, Etsy draws in shoppers looking for unique offerings. This is a key competitive strength.
What’s more, Etsy’s two-sided ecosystem, as demonstrated by its 96.6 million active buyers and 8.8 million active sellers, is supported by network effects. Consumers want to come to the site because there are so many specialized goods being sold. Small merchants and entrepreneurs looking to showcase their craft might find no better platform to set up shop to target a global customer base.
Cheap stock
The S&P 500 has climbed 19% since Etsy hit its all-time high. However, the e-commerce stock has lost 81% of its value during the same time. That’s an alarming trend.
However, it means that shares are cheap. They trade at a forward price-to-earnings ratio of 12.2, the lowest valuation in almost the last three years. This depressed multiple suggests that Etsy is a terrible business. And that’s just not true. I already talked about its differentiated marketplace offerings and the presence of network effects.
Also, consider the total addressable market, which management estimates is $500 billion (counting online sales of all relevant product categories) in its six core geographies, which includes the U.S., U.K., Canada, Australia, France, and Germany.
Plus, Etsy is a consistently profitable enterprise that rakes in lots of free cash flow every quarter. This reduces financial risk.
Depending on the state of the economy and the direction of interest rates and inflation, the fear is that the difficult times for Etsy could last for a few more quarters before things start to improve. But this is precisely where the opportunity lies for investors. I believe that three to five years down the road, this stock could be a big winner for your portfolio.
Should you invest $1,000 in Etsy right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Etsy. The Motley Fool has a disclosure policy.
1 Growth Stock Down 81% to Buy Right Now was originally published by The Motley Fool
