It has been a challenging time for investors in Etsy(NASDAQ: ETSY). The stock hit a multi-year low when the general market reached multiple all-time highs. Weak business performance and its recent removal from the S&P 500 index are critical drivers for its poor stock performance.
Still, contrarian investors have started to pay attention to the stock as they look for opportunities to buy it cheaply. But is now a good time to load up on Etsy's stock?
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Etsy faces challenges in sustaining its business momentum
When the COVID-19 pandemic hit in 2020, Etsy was well-positioned to benefit from increased supply and demand for online goods and services. Sellers had to move online to sell their products due to the closure of brick-and-mortar stores, while customers relied on e-commerce marketplaces like Etsy to shop.
Unsurprisingly, sales rose to the roof, sending revenue up by 111 % in 2020 and another 35% in 2021. Etsy's management team was so upbeat due to the strong performance that they acquired a few companies in anticipation of continued growth and prosperity.
Unfortunately, the COVID-19 pandemic boom proved to be temporary. Etsy faced massive headwinds in retaining its customers and sales in the next few years. For example, gross merchandise sales (GMS) fell 1.3% and 1.2% in 2022 and 2023, respectively. The downtrend extended into 2024 as GMS fell by 2.9% in the year's first half. Unsurprisingly, those acquisitions made during the COVID-19 pandemic periods did not live up to expectations.
The silver lining is that Etsy's revenue grew over the period, even as GMS fell and the company doubled down on its monetization efforts. Still, unless Etsy can rekindle growth in its GMS, it's not practical to rely on raising monetization rates to sustain revenue growth. An overly zealous monetization strategy could lead to unhappy sellers, who might choose to move to other e-commerce platforms.
Etsy's prospects in the coming years
Despite Etsy's challenging near-term performance, the bulls remain hopeful that the company can turn around the situation and start growing again.
Etsy operates in a gigantic arena with an estimated online total addressable market (TAM) of $466 billion. The TAM will reach $2 trillion if we include offline opportunities. With an annual GMS of $13 billion in 2023, Etsy is just at the tip of the iceberg.
To grow its business, Etsy can either grow its active buyer base, increase the wallet share of existing buyers, or do both. To this end, the company can focus on what it does best -- offering one-of-a-kind, personalized, and unique products that users can't find on other mass-market platforms like Amazon.
For instance, Etsy has gone all-in in the gifting business to become the go-to platform for anyone who wants to give unique gifts to their loved ones. The e-commerce platform estimates that this market has a $200 billion TAM, which will keep it busy for a long time. Early indicators suggest that this is the right direction for the company -- gifting GMS grew 4%, even though companywide GMS fell 2% in the second quarter of 2024.
While there are substantial growth opportunities, investors should be mindful that there's no guarantee that Etsy can reach its full potential. One issue is that the e-commerce market is becoming more crowded. Incumbents like Amazon and newcomers like Temu and Shein are all aiming to grow their market share in the U.S. and overseas. While these platforms focus on selling standardized, mass-market products, there is no guarantee that they won't start eyeing the niche market in which Etsy operates.
In other words, Etsy must execute its strategy of offering a differentiated shopping experience well to remain relevant to its buyers. Investors should closely monitor Etsy's performance in the coming quarters to determine whether the company is on track to regain its growth momentum.
A quick overview of Etsy's valuation
The other factor investors should consider before buying Etsy's stock is whether the stock trades at a reasonable price. Let's look at a few valuation metrics to help us gauge Etsy's stock valuation.
As of this writing, the stock has a price-to-sales (P/S) and price-to-earnings (P/E) of 2.7 and 25.5, respectively. These ratios compare favorably to its five-year average of 8.4 and 57.1. They also compare favorably to Amazon's P/S and P/E ratios of 3.4 and 46.4.
What it means for investors
Etsy's recent poor stock performance may have caused the stock to trade at an attractive valuation, but that's without reason.
It has been facing difficulties in growing its business lately, and this headwind could continue for a while. Besides, it made some poor capital allocation decisions during the pandemic's height, resulting in shareholder value destruction.
The silver lining is that it's not yet the end game, so Etsy could restart its growth engine if it continues delivering value to customers and sellers. If it's successful, the stock price could regain its premium valuation. But if it fails, the stock price could go even lower.
Ultimately, whether to buy the stock today depends on how much conviction investors have in Etsy's ability to rekindle growth in the future.
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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. Lawrence Nga has 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.
