Etsy (NASDAQ:ETSY) delivered another huge earnings report that showed revenue more than doubling year over year. Despite results coming in above management's expectations, the stock has fallen more than 10% following the earnings news. 

While Etsy showed why it's an emerging juggernaut in e-commerce, investors may be starting to think about how much growth is already baked into the stock's valuation.

A large room with a wooden floor, a shelf of green plants, and a desk with computers on top.

Image source: Etsy.

Another blowout quarter

It was a great quarter across the board. Excluding face masks, gross merchandise sales (GMS) grew 93% year over year, the same rate as Q2. That is more than double the growth of e-commerce in the U.S. 

Etsy is not just riding the coattails of more people shopping online during the pandemic; it's also actively making huge strides to enhance the shopping experience, such as improvements to search and introducing listing videos from sellers. These are just a few of the changes that are pulling in more and more buyers to Etsy's platform.

New and reactivated buyers grew 112% year over year last quarter. It's impressive that half of all 138 million buyers on Etsy have made at least one purchase in the last 12 months. 

These buyers are coming to Etsy for more than just face masks and housewares. Consistent with the previous quarter, Etsy saw GMS in jewelry and apparel grow 61% and 59%, respectively. The company clearly has a platform that attracts a diverse group of sellers that can adapt their product offering to meet demand across major retail categories. This is a big advantage.

What about the stock's high valuation?

Looking at the long term, Etsy will continue to hit new highs. It's got a long runway of growth. Over the last four quarters, GMS totaled $6.9 billion, which is a small fraction of the addressable market of at least $100 billion, according to company estimates.  

However, Etsy's near-term momentum seems to have already been reflected in its soaring share price this year. Going into the earnings report, the stock had tripled in value since the beginning of the year. It currently trades at a price-to-sales (P/S) multiple of 11.5. 

For perspective, let's consider how the market valued eBay back in the early days of its growth. In 2003, eBay sported a P/S ratio of 10.3, and that was with a higher profit margin than Etsy has now. I wouldn't call Etsy overvalued, but a price correction will lay the foundation for the next leg of returns.

Etsy will remain a great growth stock, but investors should be aware that it may run into difficult year-over-year growth comparisons in 2021. It's going to be challenging to beat back-to-back quarters of triple-digit revenue growth. 

CEO Josh Silverman said 2021 is "hard to predict," as it's unknown how long this pandemic-driven demand will last. We may have hit a permanent plateau of online shopping, but if Etsy's GMS growth moderates back to pre-COVID-19 growth levels, that may weigh on the stock's performance in the short term.

Regardless, Etsy has plenty of opportunity to generate more growth by bringing lapsed buyers back to the marketplace. It also continues to prove itself as a marketplace that can help small businesses compete with Amazon, and it's growing faster than the U.S. e-commerce market because of it. Investors should consider buying Etsy stock if the share price continues to fall.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.