Online crafts fair Etsy (ETSY -0.74%) says it operates "online marketplaces that connect millions of passionate and creative buyers and sellers." But on Friday, it was mainly sellers in evidence around Etsy stock.
After German megabank Deutsche initiated coverage of Etsy with a half-hearted "hold" rating (and a $145 price target indicating only a few percentage points worth of upside in the stock), Etsy stock plummeted -- down 9.8% as of 1:05 p.m. ET.
And that got me excited.
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Full disclosure here, Fools: I do not own Etsy stock (yet), but I'm about a half a psi of finger pressure away from clicking the "buy" button on this stock, and the fact that Deutsche Bank says it's not head over heels in love with Etsy doesn't scare me one bit.
Why not? Here's how I look at it: At $15.8 billion in market capitalization, Etsy is currently down about 38% from its highs. Granted, the company has a bit more debt than cash on its books, but Etsy's $1.4 billion net debt position only raises the company's enterprise value to about $17.2 billion.
Is that a lot or a little? It depends on how you look at it.
Valued on generally accepted accounting principles (GAAP) earnings, Etsy looks a little pricey at nearly 35 times trailing earnings. The thing is, though, that Etsy's income statement doesn't fully reflect the true profitability of this business, which generated $638 million in free cash flow -- real cash profits -- last year. Valued on that number, Etsy stock sells for a cheaper 27 times enterprise value (EV) free cash flow (FCF) ratio, which compares favorably to the company's expected 29% long-term earnings growth rate, as calculated by S&P Global Market Intelligence.
Now granted, in its note today, Deutsche Bank did question whether Etsy can live up to analyst growth expectations over the next couple of years, warning of "reopening headwinds" and "buyer churn dynamics." But even if these headwinds restrain Etsy's growth in the near term, so long as Etsy can achieve the projected 29% growth over the next five years, today's valuation of 27 times free cash flow (FCF) seems quite attractive to me.
Long story short, I'm looking at today's sell-off as a buying opportunity on Etsy stock. And as soon as Fool disclosure rules permit me to buy, that's just what I plan to do.
