Etsy (ETSY 0.34%) shares have been on a bumpy ride as of late. After suffering a brief hit at the start of the pandemic, Etsy stock went on an impressive bull run, peaking at nearly $300 per share in November 2021. COVID-19 brought a new wave of buyers to the e-commerce platform, leading Etsy to seven consecutive quarters where it beat Wall Street's earnings estimates.
Etsy serves a niche market where sellers offer handmade crafts and vintage treasures to buyers all around the world. This firmly positions the company moving forward, as the desire for customization and uniqueness becomes increasingly important to consumers. Etsy has seen its stock slip in recent months, and given its enormous runway for growth, many investors have taken note. Let's explore the company's present state and determine if you should consider buying the stock today.
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What's happening to Etsy shares today?
Since peaking at the end 2021, Etsy shares have suffered a substantial downturn. Many fast-growing tech names like Etsy continue to face an immense amount of downward pressure stemming from the potential for rising interest rates and the ongoing war involving Russia and Ukraine. Etsy dropped to nearly $115 per share before experiencing a nice boost in response to a positive fourth quarter earnings announcement. In late February, Etsy reported quarterly revenue of $717 million and earning per share of $1.11 to cap off 2021 -- beating Wall Street's expectations by 5% and 41%, respectively.
As a result, shares of the e-commerce company jumped nearly 20% before reverting back to the $130 range. Still, Etsy stock is down 34% in the past six months, and many investors are wondering if the bottom is near. It's never easy to predict when a stock reaches its nadir, but there's no doubt that the recent pullback has made Etsy more attractive. Given its strong top-line expansion, striking cash flow generation, and untapped market potential, Etsy makes a great case for a good investment today.
Solid financials and runway for growth
Management estimates its total addressable market across all relevant retail categories is $2 trillion. Within the "Special" goods category alone -- where Etsy's market share is only 5% currently -- the company has a $100 billion market opportunity. It's clear that the company is still in the early innings of what is a monstrous secular growth trend.
Given its three-year revenue compound annual growth rate (CAGR) of 57%, Etsy has enjoyed robust top-line growth in past years. Not only that, the company's earnings per share went from $0.76 in 2019 up to $3.40 in 2021. Generating cash hasn't been a problem either -- Etsy's five-year free cash flow CAGR is 122%, a very impressive achievement for a company that continues to grow rapidly. Etsy's financial performance has taken great strides in previous years, and all signs point to steady success moving forward.
Being that Etsy has already proved it can consistently turn a profit, investors should feel extremely comfortable with the company's current state. As the industry's upward trajectory accelerates, Etsy is well-positioned to showcase superb growth for investors in the years ahead.
An enticing valuation
Prior to the pandemic, Etsy was trading at roughly 8 times sales. The company's price-to-sales multiple surpassed 16 in November 2021 when the stock soared to record highs. Nowadays, Etsy pegs a price-to-sales multiple of 7.97, slightly lower than its five-year average of 9.
ETSY PS Ratio data by YCharts
The company is now trading at pre-pandemic levels despite steadfast growth on both the revenue and earnings fronts. Etsy is unquestionably a better company now than it was several years ago, yet it has seen its valuation plummet. This presents investors with a unique opportunity to buy shares of the company at an inexpensive price, relatively speaking. We don't know when Etsy will bottom-out, but we can exploit the market's irrationality today by acquiring shares of the company at three-year lows.
Is it time to buy?
Investors who are looking for a nice combination of revenue growth and bottom-line stability should shift their attention to Etsy. The market is undergoing a considerable correction, causing share prices of many great companies to fall inordinately. Etsy's declining valuation and massive market potential gives investors convincing reasons to look at the company today.
It's not often we're presented with the chance to buy quality companies at low prices. But that's the case with Etsy today, and investors should jump on the opportunity.
