Fears of rising inflation and interest rates have recently put pressure on high-growth technology stocks. Adding to the list of concerns is the question of whether or not pandemic winners will continue their hot streak in a more normal world.
Etsy (ETSY 1.10%), has taken a beating over the past couple months, with its market capitalization falling nearly a third since March 1. The online marketplace for special and handcrafted goods is coming off another fantastic quarter, but worries about a looming slowdown are pressuring the stock.
Here's why the sell-off is a rare opportunity for investors to purchase shares of this solidly growing company.
Image source: Getty Images.
The market focuses on the short term
Etsy, like many other e-commerce companies, was a major beneficiary of the coronavirus pandemic in 2020. Buyers flocked to the platform for their everyday needs, including face masks. Sellers, looking for ways to boost income in an otherwise tough economic environment, were attracted to Etsy as well.
And that strong momentum has carried over into this year. During the first quarter, sales and net income skyrocketed 142% and 1,048%, respectively, from the year-ago quarter. Gross merchandise sales (GMS), one of the most important metrics for a company like Etsy, soared 132% year over year. In the three-month period, Etsy sold an impressive $3.1 billion worth of goods on its platform.
But even with this kind of extraordinary performance, we know that the market is increasingly focused on the short term. If a stock is expected to underperform the next quarter or even year, it's shunned by Wall Street, which is exactly what is happening with Etsy.
Management is forecasting a huge slowdown this quarter, with revenue only expected to grow 15% to 25% in the second quarter compared to last year. However, this guidance shouldn't come as a surprise. Q2 of last year was a boon for online commerce as the pandemic kept everyone indoors, so having to go up against that comparison this quarter will be very difficult.
Furthermore, it's unrealistic for a company to grow by triple digits forever. Long-term investors understand that there will always be lumpiness quarter to quarter and year to year. Being able to look past this and focus on the bigger picture is what ultimately matters.
This is still an outstanding business
With that in mind, I think it's safe to say that Etsy is still a wonderful company despite the weak guidance put forth by management.
Its key metrics prove it. The number of active buyers (90.7 million) and active sellers (4.7 million) are up meaningfully from just the prior quarter. And the number of habitual buyers (those with six or more purchase days and over $200 in spend in the trailing 12 months) tripled in Q1 year over year. These are Etsy's most loyal and engaged buyers, and they were the fastest-growing customer segment in the quarter.
The company's competitive advantage, stemming from powerful network effects, only gets stronger as it brings on more buyers and sellers. Once this flywheel starts moving, it's extremely difficult to stop. As long as Etsy keeps improving its platform with new tools (such as better search and discovery, listing videos, and delivery predictability), users will increasingly appreciate the service.
While a return to normalcy across the world could certainly bring a temporary headwind to e-commerce growth, the continued shift to online shopping places Etsy in a solid position. Additionally, consumers are more focused now than ever before on supporting small businesses and entrepreneurs, which will only benefit Etsy more.
Investors worried about the recent sell-off should keep their attention on the long term. Etsy is still a great business. Use Wall Street's nearsightedness to your advantage and seriously consider buying shares in this top stock.
