Over the past few years, many businesses have had their results and expectations directly tied to the impact of the pandemic. Some companies have been labeled "pandemic stocks," seeing their values rise during the height of pandemic lockdowns. Other companies gained the moniker of "recovery stock," and saw their prices rise in anticipation of the reopening of the economy.
For most of these companies, neither of these labels is entirely accurate, and both lead to unrealistic expectations for investors. Now, as we move into the third year of the pandemic, let's take a closer look at one business that saw some wild price movement in both directions.
Year 1 (2020): More than masks
Etsy (ETSY 0.03%), which runs an e-commerce marketplace that connects creators and buyers of customized items, entered 2020 with shares trading for around $50. By the time 2020 came to a close, Etsy's stock had gone up 302% and ended at $177.91 per share.
Etsy's 2020 financial results help explain the parabolic growth in the share price. For the full year, Etsy posted revenue growth of 111%, a net income increase of 264%, and it grew active sellers and active buyers by 62% and 77%, respectively. Early in the year much of this revenue was driven by mask sales, but by the time the fourth quarter rolled around, mask sales accounted for only 4% of overall gross merchandise sales, showing that much of the growth could be attributed to the business's core sales.
Year 2 (2021): Strong results, bumpy ride
While the growth in 2020 was fairly steady, 2021 was a wild ride. In the spring the stock sank to a low of $156.59 before surging to a high of $296.91 in Q4, ultimately ending the year up 23% at $218.94.
Despite the choppy stock performance, the business continued its strong performance. For the full year, revenue increased 35%, net income grew 41% and active sellers increased 72%, while active buyers were up 18%. Taken at face value, this is strong growth and it could be argued it warranted even stronger stock price appreciation. When you take into consideration this was on top of the incredible results from 2020, it's even more impressive.
What's even more interesting is that Etsy ended 2021 trading at 14 times sales which was almost the same multiple seen at the end of 2020. So even though the price rose an additional 23% in 2021, the valuation remained essentially unchanged. Clearly, the market either overvalued Etsy in 2020 or undervalued it in 2021.
Year 3 (2022): Where does it go from here?
At the time of this writing, Etsy's stock price is around $102, down 53.3% on the year and the lowest it's been since July 2020. What's surprising about this 2022 drop is that in the only earnings report released this year (the fourth quarter and full-year 2021 results reported in February), the results were strong. Etsy now trades at a price-to-sales ratio of 6.2, which puts the valuation at the same level it was near the crash of March 2020.
However, Etsy is a much stronger business now than it was in early 2020. At the end of the first quarter of 2020 Etsy had 2,814 active sellers and 47,748 active buyers. By the end of 2021, active sellers had grown 167% to 7,522 and active buyers had increased 95% to 93,336. Additionally, Q4 2021 ended with a net income margin of 22%, compared to 5.5% in Q1 of 2020, showing that the company is more profitable now than when it was trading for the same valuation in 2020.
Etsy undoubtedly pulled forward some growth during the pandemic, but each earnings report seems to confirm that the buyers and sellers who were gained in the early days of the pandemic are remaining engaged and are driving revenue and profitability for the company. At the current valuation, it's difficult to see Etsy's stock as anything but a value with high potential upside.