Most of us have purchased gifts for our friends and loved ones during the holiday season. There's probably no better place to find unique, handcrafted gifts than Etsy's (ETSY -1.46%) online platform. The company's online marketplace offers creative goods and unique merchandise that connects millions of buyers and sellers. The COVID-19 pandemic has led to a surge in e-commerce, pushing up Etsy's gross merchandise sales (GMS) and revenue to new highs.

Etsy has always been known as a go-to place for gift-shopping, but the pandemic has accelerated the shift to online shopping that has hugely benefited the company. Aside from purchasing face masks to protect themselves from the coronavirus, more people have also shopped for other products and miscellaneous items with greater frequency, pushing the number of active buyers on Etsy's platform to 69.6 million, up 55.4% year over year. 

Since early 2017, Etsy's shares have soared more than 16-fold from $13 to $211 and continue to scale new all-time highs. Is there still room for the business to enjoy further growth?

Woman making handcrafted items at table

Image source: Getty Images.

Steady, consistent performance

Looking back in history, Etsy is not just a one-trick pony but has demonstrated steady and consistent growth over the years. From 2015 to 2019, the company had grown its revenue every single year without fail, going from $273.5 million to $818.4 million. As revenue rose, Etsy started reporting an operating profit in 2016 and positive net income in 2017. The company also generated copious amounts of free cash flow over the last three years, as it incurs low levels of capital expenditure.

For the first nine months of 2020, Etsy's growth has continued unabated. GMS has doubled year over year to $6.7 billion, resulting in revenue doubling year over year in tandem. Net income more than tripled year over year to $200.7 million amid an influx of buyers and sellers onto the platform. The financial and operating metrics released by the company demonstrate broad-based growth in users, active buyers, and GMS per active buyer.

A right to win

Etsy hosted an Investor Day event in March 2019 where the company outlined its five-year strategic plan and long-term targets. The plan was called "Right to Win" and focused on four core elements of Etsy's business that differentiate it from the competition and allow it to maintain a sustainable competitive edge.

The four pillars include personalized search and discovery, human connections, a strong and trusted brand, and a marketplace that features a huge assortment of special vintage and handcrafted items. These drivers remain relevant today as Etsy continues to report improvements with its search engine with the removal of guided search icons and faster page loading times. Human connections have been further emphasized with the launch of listing videos that help sellers to better market their items, while limited edition influencer collections from JoJo Fletcher and Tan France help to introduce a level of uniqueness to the platform that other e-commerce sites lack. 

A large total addressable market

Etsy estimated in 2019 that the total addressable market for retail and online commerce was $1.7 trillion across its top six geographies (comprising the U.S., U.K., France, Canada, Australia, and Germany). The market for special and unique items made up approximately $100 billion out of this $1.7 trillion. Etsy's 2018 global GMS at the time was $3.9 billion, giving it a roughly 4% market share.

Today, the e-commerce marketplace has grown much larger due to the shift to online shopping. The pace of adoption has accelerated due to the pandemic, implying that the total addressable market in 2020 should be even larger than the $100 billion two years back. Although Etsy's GMS and revenue have grown since 2018, the company still has significant potential for further growth in this fragmented sector.

The stars are aligned

Etsy is riding on the tailwinds of a structural shift to online transactions and payments. The company was already growing steadily before the pandemic, proving that it possesses a competitive strength that can continue to fuel its future growth. The stars are aligned for Etsy to continue to gain market share and attract more users, and the company's strong network effect will trigger a virtuous cycle that makes its platform even more valuable over time.

Investors should feel assured that Etsy can continue to achieve its long-term targets and post impressive growth. Though the stock has climbed sharply in recent months, it still qualifies as a buy as the company has a proven business model that can scale up to enjoy significant operating leverage.