Wall Street isn't very excited about either eBay (EBAY 1.32%) or Etsy (ETSY 0.34%) stock these days. The two e-commerce businesses are enduring a painful growth hangover in 2023 after sales soared through most of the pandemic. Shifting consumer spending patterns mean these marketplace specialists are more focused on holding on to those pandemic gains rather than expanding sales at a blazing clip.
Yet, eBay and Etsy are still fantastically strong companies with many attractive growth avenues to pursue. And with their stock prices down due to short-term concerns, now might just be the perfect time to put one of them in your portfolio. But which is the better buy? Let's dive right in.
The growth checkup
Growth-focused investors will find more to like about Etsy stock right now. That's because eBay is expanding sales at a slower clip (5% in Q3 compared to Etsy's 7%). Etsy is also gaining buyers, which is a critical factor for supporting sales volumes. Merchants tend to follow consumers to whatever platform they are using, after all. Last quarter, Etsy expanded its buyer pool by 4% to a record 92 million. eBay's pool shrank by 1%, in contrast.
Etsy is also enjoying faster growth in complementary revenue lines such as advertising and payment processing fees. Put all these factors together, and it's clear why most Wall Street pros are projecting that Etsy will grow at a 7% rate this fiscal year while eBay limps along at roughly 3%.
Margins and cash flow
Growth isn't particularly valuable if it doesn't lead to higher profits and cash flow over time. This is where eBay dominates its less-established peer. The e-commerce platform is currently converting over 20% of its revenue into profit compared to Etsy's 14%.
Both margins are well above what an investor might see from a traditional retailer, helping to illustrate how the middleman selling approach can be so powerful. Neither company has to hold expensive inventory, for example, or build a huge physical selling infrastructure.
EBAY Operating Margin (TTM) data by YCharts
The performance gap is reflected in their cash flows, too. eBay is approaching $3 billion of annual free cash flow, or more than 30% of sales. Etsy's free cash flow is more modest due to its smaller sales footprint and its focus on investing in growth. As a result, investors seeking high profits and robust cash flow will gravitate toward eBay stock.
The right price
Today, eBay shares are valued at 2 times revenue, down slightly from the valuation that investors have seen through most of the year. Etsy's premium has shrunk more quickly but remains elevated at 3.6 times sales. For context, you could purchase a high-performing but far less profitable retailer like Costco Wholesale for about 1 times annual sales.
Investors who seek growth will prefer Etsy stock for its potential to dramatically expand on its current sales base of less than $3 billion. By contrast, eBay is more of draw for investors seeking low-risk options. The e-commerce business has a huge global footprint, ample profits and cash flow, and a dividend that yields 2.5% today.
While investors will likely do well by holding either stock over the long term, eBay offers some financial benefits that make it more attractive than Etsy in this volatile market right now.
