Etsy (NASDAQ:ETSY) did especially well in the first quarter of 2020 by responding early to what was still viewed at the time by most as just a potential threat. The online marketplace for craft goods launched a COVID-19 task force in January and started testing work-from-home capabilities in February. That, combined with the surge in online spending that ensued, allowed the company to do quite well in the face of adversity.

The stock is now up nearly 80% year to date, and it's far from the value I said it was in March during the worst of the market meltdown. Still, after a great Q1 report, this e-commerce leader is a solid long-term buy.

Responding to an awful start to 2020

Coronavirus hasn't been a "win" for anyone, to say the least. Though many digital businesses are reporting increased demand for their services -- Etsy included -- thousands of lives directly affected by the virus itself and the tens of millions of lives indirectly affected due to job loss is simply heartbreaking news. The coronavirus pandemic has created a Catch-22 in the purest sense of the term: Respond to the health crisis by shutting down the economy, and many will lose work; respond to the economic crisis and leave the economy open (or open it back up too soon), and the virus could resume its spread and put stress on the healthcare system. It would be wrong to call Etsy a winner because of the crisis, but the company did its part in addressing both sides of the Catch-22. 

A small grocery cart full of shipping boxes sitting on top of a laptop.

Image source: Getty Images.

Besides taking early steps to prepare its employees for a potential pandemic and work-from-home orders, Etsy showed off the power of small business -- especially when coordinated in its mobilization in the face of overwhelming circumstances. CEO Josh Silverman talked on the earnings call about the company's push to produce and sell face masks, which ended up contributing $133 million in gross merchandise value sold (GMS) on the platform in April. For reference, Etsy reported $1.35 billion in GMS in Q1 (up 32% year over year), $228 million in revenue (up 34%), and $55.1 million in adjusted earnings before interest, tax, depreciation, and amortization (or EBITDA, up 10%).

Silverman continued that after robust growth to start the year, Etsy's efforts to mobilize its sellers are yielding some astonishing results. The need to produce face masks was recognized early, and all teams at Etsy started reaching out to sellers to get them rolling on production, figure out delivery times, and then retrain the platform's search engine (powered by Alphabet's (NASDAQ:GOOGL)(NASDAQ:GOOG) Google Cloud) so that queries about masks didn't yield Halloween costumes. Here's a sampling of the results from the month of April provided by Silverman:  

  • Etsy's core marketplace (two-thirds of revenue in Q1) grew 79% year over year.
  • Over 60,000 sellers worldwide are producing face masks on Etsy.
  • Approximately 12 million face masks were sold in April.
  • If viewed as a stand-alone unit, face masks were the second-largest sales category on Etsy in April.

It's astonishing that Etsy was able to recognize a need and rise to the occasion so quickly, all the while addressing the needs of both its employees, merchants, and ultimate customers shopping on its platform. Though a Catch-22, the needs of all of Etsy's stakeholders were addressed in its response to COVID-19. It's unfortunate that it was a catastrophe like the pandemic that demonstrated Etsy's ability, but it speaks to the power of e-commerce -- specifically of the small business, entrepreneurship, and homemade variety. 

Not quite growth at a value, but...

That focus on the success of the people and small businesses powering its marketplace is why Etsy and other entrepreneurship champions like Shopify (NYSE:SHOP) remain core holdings in my portfolio, even if the stocks are viewed by many as wildly overpriced. Etsy now trades for 48.1 times trailing 12-month adjusted EBITDA and 51.4 times trailing 12-month free cash flow (basic profits calculated by subtracting cash operating and capital expenditures from revenue).

That's primo pricing indeed, but consider that the company's second-quarter guidance called for a 70% to 90% increase in year-over-year revenue and adjusted EBITDA profit margin of 23% to 27%. It's a wide range of variables to factor for the uncertain times, but does factor for an expected easing of the April sales surge as the second quarter progresses.  

It's why Etsy remains one of the top stocks I'm buying right now. It may not come cheap and the sales bump may be temporary, but this is a powerful e-commerce business to hold for the long haul.