E-commerce stocks have made many investors rich. Over the last five years, if you invested in any of today's biggest online retailers -- be it Amazon, Sea Limited, MercadoLibre, or Shopify -- you'd have at least quadrupled your money.
In the coming years, e-commerce companies will only grow as more stores and shoppers head online. Most online retail players are vying to be the next Amazon, hoping to replicate its success or even beat the titan at its own game. But Etsy (ETSY -1.80%) is charting its own path to success, and here's how.
Not another Amazon wannabe
When it comes to e-commerce, Amazon is the undisputed king of the jungle. In fact, "how do you compete with Amazon?" has become an existential question for any up-and-coming online retailer. After all, Amazon offers customers almost everything consumers could ever want: low prices, a vast selection of products, and speedy delivery at little to no cost. And as it grows bigger and bigger, Amazon gets even better at serving online shoppers.
Shoppers indeed demand low prices and reliability from online retail platforms. But they also crave the extraordinary, unique, vintage, or authentic goods that come with a personal touch. And that's exactly what Etsy offers.
Home to millions of sellers, Etsy is on a mission to "keep commerce human." Instead of peddling run-of-the-mill goods shipped from a big factory, Etsy's merchants sell tailor-made, one-of-a-kind items. This has made the platform very popular among shoppers looking for custom gifts or something they can't find anywhere else.
Etsy's emphasis on unique, hand-made items makes it hard for traditional online marketplaces -- like Amazon -- to compete. Most e-commerce platforms, after all, focus on selling large numbers of affordable, standardized products, and delivering them as fast as possible.
But Etsy is not that bothered about price or speed. In fact, Etsy's products usually take longer to reach customers, as sellers need extra time to produce custom goods. And judging from Etsy's growth so far, shoppers are not only willing to wait it out, they'll often pay a premium to get a unique, one-off product.
Etsy's massive growth opportunity
Unlike Amazon -- which is well-known as the "everything store" -- Etsy seems laser-focused on serving niche markets. But make no mistake, these markets are massive. Etsy estimates its total online addressable market is $437 billion. Factoring in offline retail channels, Etsy is swimming in a $2 trillion global market for one-of-a-kind goods. The company recorded $10 billion in gross merchandise sales last year -- just 1% of this opportunity. Even if Etsy experiences double-digit growth over the next decade, it will still only capture a small slice of its market.
To fire up growth, Etsy can expand its customer base in the U.S. and international markets. It can enter new markets either organically or through acquisitions, as seen with last month's deal to buy Elo7 -- what it calls the "Etsy of Brazil." Complementing organic growth with strategic acquisitions is a smart move by management. For one, the company has a strong balance sheet to back up these deals. As it grows the profitability of its existing business, Etsy will likely continue generating significant amounts of cash flow, which it can reinvest in these younger, but fast-growing ventures.
Moreover, Etsy is in good hands. CEO Josh Silverman has decades of experience growing technology and e-commerce companies, such as Skype and eBay's shopping.com. Silverman's leadership will prove handy as Etsy enters its next phase of growth.
Is Etsy a buy now?
By now, it's not hard to see why Etsy has an exciting future. With its unique marketplace offering, Etsy has managed to carve out a valuable niche for itself. And moving forward, Etsy has massive growth opportunities -- and the balance sheet to back it up.
Etsy's incredible rally reflects this positive outlook. The stock has gained a monstrous 1,890% since July 2016 and is up 80% over the past 12 months.
While I like Etsy as a company, I believe the stock's recent run-up -- while justified -- also makes it too hot to handle. So I'll be watchlisting Etsy first while waiting for a better entry point -- such as the next market correction.