While it seems like most companies are underachieving this earnings season compared to Wall Street estimates, Etsy's (ETSY -1.65%) latest numbers were a welcome surprise. The online marketplace for special and handcrafted goods reported revenue of $594.5 million and adjusted earnings per share of $0.58, both exceeding consensus forecasts. And the stock jumped more than 10% following the upbeat news. 

Etsy's recent performance is a good reason for investors to take a closer look at the stock as we head toward the key holiday shopping season. Here's why this top e-commerce stock might be a worthy addition to portfolios right now. 

Strong third-quarter numbers 

During the three-month period that ended Sept. 30, Etsy posted gross merchandise sales (GMS) of $3 billion, which was down 3.3% from the year-ago period. Active buyers of 94.1 million and active sellers of 7.4 million both decreased compared to the year-ago quarter. Despite these headwinds, revenue was still up 11.7% year over year. 

Higher sales were made possible by a fee hike that Etsy imposed on its seller base last year, raising it from 5% to 6.5%. This increases the take rate, or the amount of GMS that Etsy keeps as revenue. Plus, services revenue, which includes things like ads and shipping, jumped 10.3% versus the prior-year period as sellers increasingly use other features that Etsy offers. 

The positive fourth-quarter sales guidance of $740 million at the midpoint was welcome news given how concerned investors are that inflation is going to dampen the upcoming busy shopping season. In Etsy's case, because the company's marketplaces skew toward discretionary purchases, it might be even more adversely affected if consumers tighten their spending. But to see management's optimism for the current quarter is a wonderful sign. 

It wasn't all good news, though. In the quarter, management took a $1 billion write-down on its acquisitions of secondhand fashion reseller Depop and Brazilian marketplace Elo7 that the business made in the summer of 2021. While this move is an admission that the executive team seriously overpaid during the strong market environment last year, the strategic rationale made sense. Thanks to Depop and Elo7, Etsy is a true "house of brands" that can cater to various shopping niches. 

A significant value proposition 

What makes Etsy a special business is that it provides tremendous value for both buyers and sellers. A whopping 88% of buyers agree that Etsy offers items they wouldn't be able to find anywhere else. And this easily makes Etsy a top shopping destination for birthdays, holidays, and other important occasions in people's lives. 

At the end of the third quarter, Etsy counted 7.6 million habitual buyers, or those who shopped at least six times and spent a minimum of $200 in the trailing-12-month period, good for a remarkable 223% gain over the past three years. It will be crucial for the business to continue to find ways to get buyers to visit the site more frequently to boost repeat purchases. 

For sellers, Etsy is an indispensable partner to reach a global audience of tens of millions of shoppers. The company's importance to its seller base can't be overstated, as many merchants are solo entrepreneurs looking to make extra income from the comfort of their homes. While the latest fee hike was met with criticism from sellers, Etsy has successfully raised transaction rates multiple times in the past, yet the company has continued to grow because of its value proposition. 

Yes, Etsy's user base of both buyers and sellers did fall year over year in the third quarter, but I'm not too concerned. The company thrived during the pandemic, and in the process significantly grew active buyers and active sellers. Consequently, I view the slight drop in users as a post-pandemic leveling out that followed unprecedented gains in 2020 and 2021, probably spurred by a weakening economy that we're seeing right now. 

Look at the valuation 

Over the past five years, Etsy's stock has climbed 493%, absolutely crushing the broader S&P 500 index by an incredibly wide margin. And this performance comes with the stock down 55% in 2022. As a result, shares now trade for a price-to-earnings ratio of 35. 

This might appear expensive at first glance, causing investors to hesitate on scooping up the stock. But consider that between 2016 and 2021, Etsy posted compound annual revenue growth of 44.8%. And during this five-year stretch, net income went from $2.1 million to $633.4 million. And Wall Street still sees double-digit top-line growth over the next few years. 

Etsy is an outstanding business that just reported a strong quarter at a time when many other companies are struggling greatly with the macroeconomic backdrop. It might be worth paying what seems like a premium valuation for this top stock.