Shares of online marketplace Etsy (ETSY 1.44%) fell 20% in March according to data provided by S&P Global Market Intelligence. The e-commerce company's phenomenal pandemic growth has been slowing down, and investors may feel that much of its future potential has already been baked into the price.
Etsy posted fantastic growth at the beginning of the pandemic. The e-commerce site, which has a niche market for its handmade and exclusive goods, exploded as customers flocked to it to buy custom face masks and other pandemic-related items. In the process, millions of new shoppers were exposed to the company's range of products, and many have stayed on as regular customers.
But triple-digit sales growth has decelerated to double-digit growth as the company builds on top of its phenomenal pandemic performance. The fourth-quarter report was released in February, and it demonstrated continued, but slowing, sales growth. Revenue was up 16% year over year, and gross merchandise sales (GMS) also increased 16% to a record $14.2 billion. GMS per active buyer for the trailing 12 months was $136, a 16% year-over-year increase. Net income increased from $148 million to $162 million.
Although those numbers aren't as impressive as last year's, CEO Josh Silverman pointed out that Etsy sellers, who are small businesses that typically source locally, were able to keep their output and sales flowing because they have much less exposure to the current supply chain problems. This is another way Etsy stands out, in addition to its differentiation through its exclusive products, and it speaks to the company's resilience and flexible model.
These are all positive signs despite the slowdown. However, the company's stock price, which gained 300% in 2020, may have been too high for many investors. It's now down 35% over the past year, and the current valuation of 40 times trailing-12-month earnings is very reasonable for a company with its potential.
Triple-digit growth was never sustainable long-term, and Etsy is transitioning into a slower-growth company. Still, management is guiding for sales to increase only about 5% for the 2022 first quarter, another slide into single-digit growth territory, and that's disappointing for investors. But its long-term prospects look strong, and I think Etsy's story looks compelling, especially at this price.