Is Etsy's Sell-Off Overdone?

Etsy (ETSY -2.17%) has been on fire. The e-commerce platform for entrepreneurs and craftspeople has surged 200% since the start of 2018, riding high as last year's revenue growth reaccelerated to 37% and resulting adjusted profits grew 74%. 2019 is off to another good start as consumers continue to flock to the online marketplace for unique handmade items.

Yet in spite of Etsy's resurgence, the stock has recently sold off as much as 20% from its all-time high. On one hand, Etsy shares aren't cheap, and they already have a year's worth of growth baked into their current valuation, but on the other, shares aren't quite as pricey as they might appear on the surface. There's still a lot of runway left for this online retailer. Here's a case for buying the dip.

Image source: Getty Images.

Boutique stores are making waves online

Etsy has utterly silenced worry that competitors like eBay or Amazon.com's Handmade might eat into its upward trajectory. After gross merchandise sold (GMS) topped $3.9 billion on the site last year, the metric surged another 19% during the first quarter of 2019 to over $1 billion, putting the company on track to reach nearly $5 billion GMS for the full calendar year. Combined with an increase in fees taken over the summer of 2018 and other merchant services, first-quarter revenues surged 40%.

Data source: Etsy. PP = percentage point. EBITDA = earnings before interest, tax, depreciation, and amortization.

Esty is benefiting from a powerful network effect as more and more buyers and sellers flock to the platform. Gross profit margin got a nice bump, and while money is still being funneled into marketing, expenses are increasing at a slower pace than the top line. The result is a bottom line that is growing even faster and will continue to do so as more small-business merchants and craftspeople make use of the site.

A moderating but strong tailwind

As Etsy begins to lap its price hikes, results are expected to moderate as 2019 progresses. Full-year revenues were forecast to be 30% to 32% higher, and adjusted EBITDA in the range of $182 million to $198 million -- up 36% over 2018 at the midpoint of guidance. Still, there's not much to complain about as far as those growth rates are concerned.

The only problem is that, even after the stock's recent pullback from highs, Etsy is valued at 70 times trailing 12-month earnings and 59 times forward earnings. Still rich enough to keep many investors away but not totally unreasonable given the e-commerce company's momentum.

Even with the high price tag, now could be a decent time to pick up some shares of Etsy while it's at a double-digit discount relative to its peak. Consumers are still going digital (online store sales are up another 11% overall so far in 2019, according to the U.S. Census Bureau), and Etsy is gobbling up share at a faster rate than average. As with any high-priced but high-growth endeavor, volatility will run high. But with the company still expecting better-than-30% revenue growth this year and even better profitability, it's worth a look for those who can stick with it for at least a few years.