What happened

Etsy (ETSY 0.16%) shareholders lost ground the market last month as shares dove 25% compared to a 9% decline in the S&P 500, according to data provided by S&P Global Market Intelligence. The drop contributed to significant losses so far in 2022 for owners of the online marketplace stock. Shares are down nearly 60% this year compared to a 14% drop in the wider market.

The slump was driven by fears about an impending growth hangover as consumers change their shopping behavior following a period of intense focus on e-commerce through earlier phases of the pandemic.

A florist working on a tablet.

Image source: Getty Images.

So what

Etsy's stock slump came as investors lost interest in many high-growth companies that had expanded at a quick pace during the COVID-19 pandemic. E-commerce giant Amazon dropped roughly 25% in April. Wayfair, an e-commerce player focused on the home furnishings niche, fell 31%.

There are specific worries about the Etsy business, too. The company said in its last earnings announcement that revenue growth slowed to 17% in Q4 after having soared by over 60% in the first half of 2021. Investors are bracing for further decelerations ahead, given the fact that consumer spending patterns are shifting back toward in-person shopping.

Now what

Some of these growth questions will be answered when Etsy announces its fiscal first-quarter earnings results on May 4, after the market closes. Most investors expect the platform's revenue gains to slow to about 9% in that report. That increase would mark a huge jump over its pre-pandemic sales rate, while still showing much slower growth than investors saw through much of 2020 and 2021.

A period of weaker sales and earnings trends is to be expected following Etsy's huge sales gains in those fiscal years. Investor returns will ultimately derive from the company's ability to continue attracting more sellers and buyers to its platform.

If Etsy succeeds in building out its reach, and in adding more value for sellers so that it can continue steadily increasing its transaction fees, then the stock is likely to recover from the recent downturn.

The timing of such a rebound would depend on a shift in investor sentiment, too, given that many on Wall Street are currently favoring businesses with less volatile sales trends, steadily rising earnings, and cash returns in the form of dividends and stock repurchases. As a growth stock, Etsy is more focused on investing in its business today.