Choosing which stocks to buy can be an overwhelming endeavor for both new and experienced investors. One effective strategy for sorting through the many choices can be to seek out companies that are proven winners, have favorable attributes, and benefit from attractive long-term prospects. Further, you should plan to hold the stocks you purchase for at least five years.
First is the powerful network effect. Etsy currently has 5.2 million active sellers and 90.5 million active buyers on its platform. The more it grows the number of sellers on its platform, the more useful it becomes to buyers. That attracts more customers, who in turn make Etsy more valuable for sellers. Its growth has been powered by this virtuous cycle, and now that it has reached its current size, it will be hard for would-be rivals to get a foothold and repeat the process. Last quarter, Etsy handled more than $3 billion of gross merchandise sales (GMS), and its trailing 12-month GMS per active buyer was up 22% over the prior period.
Second, Etsy has notable scale advantages -- simply put, as it grows sales, profit increases even faster because the fixed costs are spread over a higher revenue base. Etsy's operating margin in the second quarter of 2016 stood at 5.5%. Now, it's 18.7%. This is a clear indicator of scale at work.
All of this is enabled by Etsy's technological infrastructure. Every time an additional transaction occurs on its site, it's extremely high-margin. Think of a huge sports stadium with some empty seats. Filling these seats with more fans costs almost nothing because the investment in the building has already been made. Etsy's platform can be viewed similarly. Its capital expenditures in any given quarter are almost nonexistent.
Another key aspect of a winning company is the potential for long-term growth. Etsy's management focuses on seven core geographies today -- the U.S., U.K., Canada, Germany, Australia, France, and India. Together, these markets represent a $1.7 trillion opportunity for the company. And its recent purchase of Elo7, known as the Etsy of Brazil, gives the business access to the largest e-commerce market in Latin America.
Etsy already offers a wide assortment of items, ranging from jewelry and beauty supplies to home decor and collectibles. And now Depop, a secondhand fashion site Etsy acquired earlier this year, bolsters the company's position in the single largest e-commerce product category: apparel. An incredible 90% of Depop users are from the Gen Z demographic, so by acquiring it, Etsy has increased its access to that younger customer base.
The broad secular trend toward online shopping, coupled with consumer interest in supporting small businesses, helps Etsy's outlook. And its potential now to expand into new countries and product categories further increase the total opportunity.
A premium price tag
Although the stock is down roughly 3% over the past six months, it still trades at a forward price-to-earnings ratio of 59. This may seem like an expensive price to pay for new investors, but consider that Etsy has grown sales and net income at an extremely high rate over the past few years. And the stock has historically crushed the S&P 500, demonstrating that buying Etsy at any point in the past and holding for the long term would have been a fruitful endeavor. What's more, the consensus forecast of Wall Street analysts calls for earnings to increase at an annual clip of 21.5% from 2020 through 2023.
There's enough to like about Etsy's business to warrant what looks like a steep valuation multiple. This e-commerce enterprise is a proven market winner with strong competitive advantages -- and in my view, it's the best stock to buy right now with $1,000.