3 Reasons to Buy This Supercharged Growth Stock

Etsy (ETSY -0.48%) recently announced second-quarter earnings that beat Wall Street's expectations on both the top and bottom lines. But weak guidance sent shares tumbling, and the stock is now down 23% off its 52-week high.

Of course, it's never fun to see red in your portfolio, but these short-term pains create opportunities for long-term investors. Here are three reasons to buy this supercharged growth stock.

Image source: Getty Images

1. Etsy's big market opportunity

Etsy is a marketplace for unique and specialized goods, connecting millions of buyers with artisanal sellers around the world. Its platform currently lists 92 million items, ranging from handcrafted home furnishings and artwork to vintage apparel and personal accessories.

However, Etsy recently expanded its scope with the acquisition of Depop, a fashion resale marketplace popular with Gen Z consumers. This move extends Etsy's presence in the apparel industry, the largest vertical in e-commerce. Moreover, it comes on the heels of its 2019 acquisition of Reverb, an online marketplace for musical instruments.

In both cases, these acquisitions further diversify Etsy's inventory, helping the company tap into massive demand across digital retail categories. In fact, management puts Etsy's market opportunity at $437 billion by 2024, but that figure hits $2 trillion if you include relevant products sold offline. In other words, Etsy has a big market opportunity, and it should only get bigger as e-commerce takes share from brick-and-mortar retail.

Image source: Getty Images

2. Etsy's unique business model

Etsy's mission is to keep commerce human. To that end, its business is built around specialized goods -- the type of things that can't be mass produced or commoditized. This makes Etsy different from most other retailers. In fact, 88% of surveyed buyers believe Etsy lists products they can't find anywhere else.

In other words, Etsy's brand name has become synonymous with unique items, and that's no accident. The company has invested heavily in building buyer trust and supporting sellers. For instance, its platform offers services like payment processing, discounted shipping, and advertising, as well as tools to track inventory, access analytics, and chat with consumers.

Etsy also provides educational support. The Etsy Seller Handbook is a collection of free resources ranging from branding advice and growth strategies to legal insights and tax information, all designed to help sellers run successful businesses.

Collectively, these actions have drawn 5.2 million sellers to Etsy. More importantly, each new seller enhances the diverse inventory of the site's marketplace, further incentivizing consumers to shop on the platform. As a result, Etsy now has 90.5 million active buyers. This network effect has been a powerful growth driver, and it should only get stronger as Etsy's ecosystem expands.

3. Etsy's strong financial performance

According to eMarketer, global e-commerce sales hit $4.2 trillion in 2020, up from $2.4 trillion in 2017. Put another way, online retail sales are growing at about 21% per year. That's impressive, but Etsy's gross merchandise sales (GMS) have beat that figure by a wide margin. Between 2017 and 2020, the company's GMS grew 47% per year, indicating that it's gaining market share.

Moreover, Etsy's take rate is expanding. It hit 17.4% in the first half of 2021, up from 13.6% in 2017. That dynamic -- strong GMS growth compounded by a bigger take rate -- has supercharged the company's financial performance.

Source: Ycharts. TTM = trailing-12-months. CAGR = compound annual growth rate.

Looking ahead, I expect Etsy's growth to slow in the near term. The company will face tough year-over-year comparisons through the first quarter of 2022. That being said, management is executing on a strong growth strategy -- improved search functionality, better post-purchase experience, geographic expansion -- and these efforts are paying off, as evidenced by the company's financial results.

Here's the big picture: Etsy has differentiated its marketplace from big box retailers, and the company should continue to benefit as e-commerce becomes more popular with consumers. That's why this growth stock looks like a smart investment.