As the e-commerce industry grows, dozens of companies are deploying various -- and often very different -- strategies to tap into this lucrative opportunity. One such company is Etsy (ETSY -2.62%), which focuses on providing e-commerce platforms for the exchange of unique, specialized, creative, and often handmade goods. If the company's returns in recent years are any indication, its strategy seems to be working: Since 2015, Etsy's share price has more than doubled. But with the company currently trading at nearly 60 times projected future earnings, it is worth a look to see whether Etsy's prospects can justify its lofty valuation.

Tiny shipping boxes sit on a laptop keyboard.


How Etsy got this far

Etsy's market-beating returns have been backed by solid performances almost across the board. Here are just a few stats to consider:

  • Between 2015 and 2018, Etsy's revenues increased by 120%. The company's largest segment by revenue -- marketplace revenue -- grew by 232% over the same period.
  • Etsy's gross merchandise sales (GMS) -- the dollar value of all products sold through its website -- has increased by 105% since early 2015. The percentage of its GMS generated on mobile devices has increased by 16%.
  • The number of active sellers on the company's platform is up by 63% since 2015, and the number of active buyers is up by 105%.
  • Etsy's net loss per share of $0.59 in 2015 turned into positive earnings of $0.69 per share in 2018.

Despite having to compete with much larger platforms such as Amazon, Etsy has built a strong reputation with buyers and sellers interested not just in generic goods, which countless other online marketplaces provide, but those interested in a specific class of products. Etsy's strong performance in recent years is in part explained by its dominance in this specific segment of the e-commerce market.

Can Etsy keep this up?

To be fair, Etsy hasn't had a flawless journey to its current levels. Case in point: Back in August, the company's stock took a bit of a nosedive after it released its second-quarter earnings report. The sell-off was probably due to a decline in the company's service revenues, which had been somewhat stagnant in recent years.

But this relatively minor headwind aside, Etsy's shareholders still have much to look forward to. First, the reputation and the ecosystem Etsy has successfully built are invaluable tools. The company now boasts about 43 million active buyers and 2.3 million active sellers. As these numbers keep growing, so will the company's GMS, and so will its revenues.

Second, Etsy currently holds a minuscule 4.3% market share in the specialty goods segment, and there's a lot of room for growth if estimates putting the value of this global market at more than $1 trillion are even remotely accurate.

Finally, in a move to further increase its market share, Etsy recently acquired Reverb -- an online marketplace for new, used, and vintage musical instruments -- for about $275 million. Note that this deal fits well within Etsy's strategy, since Reverb focuses on a particular, specialized niche of the market and has been growing rapidly since it was founded in 2013. With this acquisition, Etsy extended its reach, which could pay rich dividends down the road.

A bright future

Despite Etsy boasting sky-high valuation figures, such metrics are somewhat typical of growth stocks. Given the company's performance in recent years and its growth prospects, I think Etsy might well be undervalued right now.