Shares of e-commerce site for handmade goods Etsy (NASDAQ:ETSY) didn't fare so hot in 2019. Off to the races early and rallying 50% higher in the first quarter, the stock subsequently reversed course and ended the year down 6%.  

However, business is still doing better than just fine, and shareholders have been treated to a 280% return since the start of 2017 as CEO Josh Silverman has rekindled profitable growth for the small digital marketplace. I think this is less a story of a beat-up e-commerce stock, and more a buy-the-dip-before-further-gains situation.  

A miniaturized shopping cart full of boxes sitting on top a laptop, illustrating e-commerce.

Image source: Getty Images.

Why so much pessimism?

First off, let's address the elephant in the room here: The 40% drop in Etsy stock is off of all-time highs. Nothing really bad happened at Etsy over the last year. On the contrary, through the first three quarters of 2019, management forecast full-year gross merchandise value (or GMS, the value of all goods sold on the platform) to increase at least 20% and revenue to increase at least 30% -- when excluding the $275 million acquisition of music equipment sales site Reverb last summer. When adding Reverb back into the mix, total GMS and revenue growth is expected to be at least 25% and 34%, respectively.  

So what gives? As good as results have been, full-year expectations do represent a slowdown -- with or without Reverb. GMS and revenue were up 21% and 37%, respectively, in 2018 with revenue, in particular, getting a big boost from Etsy raising its selling charge from 3.5% to 5% last year. As expected, the positive effects of that fee increase have worn off a bit.  

Metric

Nine Months Ended Sept. 30, 2019

Nine Months Ended Sept. 30, 2018

Change

Revenue

$548 million

$404 million

36%

Gross profit margin

67.1%

66.9%

0.2 pp

Operating expenses

$304 million

$225 million

35%

Earnings per share

$0.51

$0.29

76%

Adjusted EBITDA

$132 million

$88.2 million

50%

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

But what hasn't worn off is the company's steadily rising buyer and seller network. Active buyers and sellers increased 19% apiece year over year in the third quarter alone. Added to the rest of 2019's results, that has led to an acceleration in GMS to 24% for 2019 to date. Merchandise sold on the platform is the key driver for revenue and profits, so that's great news. Reverb has certainly helped, but music to any growth investor's ears is that Etsy is becoming more efficient as it adds new users to its platform. Gross margin on services rendered and the bottom line (as measured by both earnings per share and Etsy's preferred adjusted EBITDA profit metric) are on the rise.  

Maybe not a value, but fair-priced for the growth

Stellar business results paired with a 40% share price pullback should be enough to get investors' attention. In the last year, Etsy has gone from high-flying momentum stock to something almost resembling a value. The price-to-free-cash-flow ratio (money left over after basic operating and capital expenses are paid) is at 27.5. Forward price to earnings based on the next year's worth of results expectations values the stock at 28.1 -- not exactly cheap, but considering a company growing revenue north of 30% and profits even faster ... that's quite the growth-at-a-value prospect. For the sake of comparison, the S&P 500 trades for 19.3 times forward earnings, pricing in high single-digit earnings growth.

Thus, I'm sold and am ready to buy in on Etsy after waiting patiently for over a year as the huge share price run-up has taken a breather.