Like many investors, I had quite a few stocks that delivered tremendous returns in 2020. I fully expect many of them to be big winners again in the new year.
My portfolio spans a wide range of industries -- biotech, renewable energy, tech, and more. Most of them have the potential to generate strong double-digit gains this year. But I especially like the prospects for one of the stocks I own. My top growth stock for 2021 is none other than Etsy (ETSY -0.86%).
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What sets Etsy apart
The rise in online shopping in recent years has diminished the human touch in many ways. Etsy's e-commerce platform for handcrafted goods goes against that trend. It's fitting that the company's slogan is "keep commerce human."
One big component of Etsy's appeal is that offers unique products. A 2019 survey found that 88% of buyers said that Etsy had items that they couldn't find anywhere else. Many of those products are personalized to customers' specifications.
E-commerce, in general, is booming. But Etsy's growth rate more than doubles that of the U.S. Census Bureau's e-commerce benchmark.
What about competition from the 800-pound gorilla in the e-commerce market, Amazon.com? Etsy has proven to be practically Amazon-proof. The company has been able to carve out a successful niche in large part by making it easier and more profitable for sellers to use its platform.
An enormous opportunity
Etsy aims to essentially own the market for "special" handcrafted products. And that's a huge market -- roughly $100 billion annually. Etsy currently claims a market share of around 5%, giving it a massive growth runway.
But Etsy's opportunity is actually much greater. Online purchases in the product categories that are relevant to Etsy in its top six markets total close to $250 billion per year. The total addressable market in the company's top six geographies across all relevant retail categories stands at $1.7 trillion.
Can Etsy significantly expand its share of this enormous potential market? I think so. The company seems to have a smart strategy to make it happen.
Etsy has invested heavily in improving its search engine. Its search is becoming increasingly more personalized to learn a given customer's preferences. For example, one person's search for "dress" will return different results than the same search by another person based on their previous viewing and buying patterns. This should boost sales over the long run.
The company is also engaging more frequently with buyers. Etsy lets buyers know about discounts on certain products then sends a few reminders before the offer expires.
It's ramping up marketing significantly, including major TV and social media campaigns. Etsy's exclusive "Influencer Collections" linked with celebrities has been especially effective.
One notable risk
There's one risk for Etsy that particularly stands out, though. The stock trades at a sky-high 86 times expected earnings. With this premium valuation, any bump in the road could cause Etsy's shares to plunge.
Of course, most growth stocks aren't cheap. My view is that Etsy's valuation risk isn't a huge worry. The company's one-of-a-kind e-commerce platform gives it a distinct competitive advantage. Etsy should be able to continue attracting new buyers as well as boosting the average spend per buyer, keeping its remarkable growth story going.
Etsy's shares quadrupled in 2020. I don't look for a repeat performance at that level this year. However, it won't surprise me at all if Etsy doubles in 2021.
