Navigating the stock market to identify lucrative investment opportunities can seem like a daunting task for beginners. Turn on the financial news, and you're immediately flooded with talking heads discussing a wide variety of topics that really don't apply to long-term investors.
On the contrary, what really matters is identifying great businesses that have competitive strengths and sizable growth opportunities that you plan to hold in your portfolio for many years. If you're looking to invest $1,000 today, then look no further than Etsy (ETSY -2.17%), the online marketplace for unique and handcrafted goods.
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Powerful competitive advantages
When first looking at a potential stock purchase, I need clear evidence a sustainable competitive advantage exists. These are rare qualities that allow a particular business to outperform competitors. In Etsy's case, this takes the form of a network effect.
As of Sept. 30, Etsy had 96.0 million active buyers (up 37.8% year over year) and 7.5 million active sellers (up 102.7% year over year) on its platform. A huge user base like this means buyers enjoy a wide assortment of goods and services, while sellers have access to a large pool of potential customers. In other words, the more users Etsy attracts, the more valuable the entire platform becomes.
Bolstering Etsy's competitive positioning is the fact it offers users a truly differentiated value proposition. A company survey from 2020 reported that a remarkable 88% of buyers said they find items on Etsy that they can't find anywhere else. And the company gives sellers the chance to pursue their own entrepreneurial ambitions by supporting their small businesses and giving them a global audience.
In the most recent quarter, Etsy generated revenue of $532.4 million on gross merchandise sales (GMS) of $3.1 billion. Both numbers were up 17.9%, adding to a monster performance in the prior-year quarter when revenue skyrocketed 128.1% during the height of the pandemic.
A long growth runway
While Etsy has buyers and sellers in many countries across the globe, management considers seven markets (U.S., U.K., Canada, Germany, Australia, France, and India) as key geographies. During the third quarter, 42% of GMS came from outside the U.S., up from 35% in the year-ago period.
According to management, Etsy's total addressable market is a whopping $1.7 trillion. This figure was lifted by the acquisitions this summer of Depop, a global secondhand fashion site, and Elo7, the Etsy of Brazil. CEO Josh Silverman wants the company to become a "house of brands" -- a complete shopping destination for anything special and unique.
As Etsy continues to increase sales by boosting its international presence, profitability will rise, thanks to the inherent operating leverage in the business model. Many of Etsy's costs are largely fixed, like marketing and product development, so as revenue grows, net income soars. Its profit margin flipped from negative 19.8% in 2015 to 20.2% in 2020.
Meaningful pullback
Since hitting its all-time high in late November, Etsy stock has reversed course, falling more than 25% on no major news. My guess is that Etsy is moving in step with many other fast-growing stocks that have pulled back in light of fears from the Omicron COVID-19 variant and the effect it might have on the global economic recovery. And with inflation proving to be longer lasting than initially anticipated, the Federal Reserve's potential decision to taper bond purchases at an accelerated rate could be spooking the market as well.
For long-term investors, recent price weakness like this can be viewed as a buying opportunity. From a quality perspective, Etsy is an outstanding business benefiting from the unstoppable growth of e-commerce. With $1,000 to put to work, Etsy makes for a fine investment.
