What happened

Shares of Etsy (ETSY -1.77%) plunged by 66.6% in the first half of 2022, according to data from S&P Global Market Intelligence.

The e-commerce platform's shares rode the surge in e-commerce during the pandemic to post a nearly fivefold increase from the beginning of 2020 till the end of last year. However, after losing close to two-thirds of their value, shares are now trading just 63% above the level they were before the pandemic broke out.

Handmade Gift packages

Image source: Getty images.

So what

Etsy was one of the big beneficiaries of the sharp surge in e-commerce as more people hopped on to the internet during the pandemic. The company reporting stellar growth for 2020, with revenue more than doubling year over year and net income more than tripling. Gross merchandise sales (GMS), a measure of transaction activity on Etsy's platform, also doubled year over year to $10.3 billion.

When the company released its 2021 earnings report in late February, it was evident that growth was slowing. Revenue and GMS increased by 35% and 31.2% year over year, respectively, while net income climbed by 41.3% year over year to $493.5 million. While this performance was respectable, investors were probably expecting something better, as the numbers were a stark contrast to what Etsy had reported for 2020.

For the first quarter of 2020, Etsy disappointed investors with GMS and revenue growth of just 3.5% and 5.2% year over year. To make things worse, operating expenses also ballooned by 25.2% year over year, resulting in a 40.1% year-over-year plunge in net income to $86.1 million. Guidance for the second quarter of 2022 implied just a 0.3% year-over-year increase in GMS, seemingly signifying that growth had halted for the e-commerce platform.

Now what

Investors were rightfully dismayed by the company's financial and operating numbers, as Etsy just last year had concluded the acquisitions of Depop, a fashion resale marketplace, and Elo7, a Brazilian marketplace for unique handmade items. Expectations were high for these two acquisitions to increase Etsy's customer base and add to its GMS, but the surge in demand for e-commerce had started to moderate as economies reopened and people reverted to physical activities.

There's reason to be optimistic, though. Etsy has garnered a significant number of new buyers and sellers in the past two years, which has transformed its marketplace. The number of sellers more than doubled over the period to 5.5 million, while buyer numbers jumped 80% to 89.1 million. The company prides itself on having a platform for handcrafted items that can't be found elsewhere and believes there is a significant opportunity to convert around 100 million lapsed buyers -- customers who haven't purchased in more than a year -- back to its platform. Investors need to be patient, though, as the company slowly works to recapture these customers and boost its numbers again.