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Here's Why You Should Buy Etsy Stock and Hold for the Next Decade

By Neil Patel – Dec 17, 2021 at 9:10AM

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Superb financials combined with the secular growth of e-commerce make this a winning investment.

As the world slowly tries to put the pandemic in the rearview mirror, businesses that previously surged in the wake of lockdown measures are now seeing their shares pull back. Etsy (ETSY -3.47%) is one such stock with a 20% decline in the past month. Worries about consumers resuming their offline spending, coupled with the ongoing rise in inflation, are scaring investors. 

But even with the recent volatility, Etsy is great stock to own over the long term. 

Person taking things out of a box.

Image source: Getty Images.

Outstanding financial metrics 

If you need proof of how remarkable a business Etsy is, then take a look at some of its key financial metrics.  

Over the first nine months of 2021, the company's net profit margin was a stellar 20.6%. Etsy has shown it benefits greatly from operating leverage. In other words, net income rises faster than sales thanks to a largely fixed cost structure. In 2015, the business wasn't even profitable (annual loss of $54 million), which shows you just how quickly management has been able to boost the bottom line. 

The company's take rate, or the amount of gross merchandise sales (GMS) it counts as revenue, was 17.5% in the third quarter. And it has increased over time, a clear indicator of how the company is growing the reach and scale of its platform as its user base clears 7.5 million active sellers and 96.0 million active buyers. In addition to charging mandatory fees for listing, transaction, and payments services, Etsy offers ads and shipping features

And probably the most important thing investors should know about Etsy is that it generates lot of cash. Because Etsy's marketplace simply connects buyers and sellers, it holds no inventory, freeing up capital that would otherwise be tied up. Over the past 12 months, the business produced $584.4 million of free cash flow on revenue of $2.2 billion. 

Riding the growth of e-commerce 

Supporting Etsy's rise has been the surge in online shopping, a trend accelerated by the pandemic. Although e-commerce's share of overall retail sales fell to 13% in the third quarter, down from nearly 16% during the height of the pandemic last year, the ongoing shift away from brick-and-mortar retail is undeniable. 

Management expects full-year 2021 revenue to jump 32.5%, an impressive gain when compared to the monster 111% growth registered in 2020. Many investors were worried that as the pandemic receded, declining activity on the marketplace would put pressure on revenue.

Looking ahead, Etsy has a huge opportunity in markets outside the U.S. India, for example, can meaningfully expand the company's already massive $1.7 trillion addressable market. The South Asian nation was recently added as a core geography for Etsy (the others being the U.S., U.K., Canada, Germany, Australia, and France), a sign management views the country as extremely promising long term. 

And the recent acquisitions this summer of Depop, a secondhand fashion reseller, and Elo7, known as the Etsy of Brazil, will make Etsy's expanding user base even stickier in 2022 and beyond. An ability to offer buyers and sellers a truly differentiated experience can help the company fend off rivals like Amazon, without the need battle over pricing or fulfillment speeds.

Don't take the recent slide in the share price as your signal to sell. Etsy is still a great business with the financial base and growth to help lift your portfolio. Use the recent market volatility to your advantage, and consider buying the stock at these levels.

I plan on owning this business for a very long time. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Neil Patel owns Etsy. The Motley Fool owns and recommends Amazon and Etsy. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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