E-commerce sales have slumped this year after a slowing of the online shopping surge spurred by the pandemic. As a result, most e-commerce stocks have fallen sharply.
Specialty goods and handcrafted e-commerce platform Etsy (ETSY -0.24%) has fared better than most other major e-commerce platforms this year. But despite better-than-anticipated earnings, its stock still remains down 45% from its high.
Does that mean it's a good time to buy this growth stock? Let's take a closer look to see.
What's happening with Etsy
Etsy's third-quarter earnings beat analyst expectations with revenue up 11.7% year-over-year. However, gross merchandise sales (GMS), which represents the total number of products sold on its site, was down 3.8% from last year. Its active buyers and sellers also fell from the previous year. And the company reported its first net loss -- about $963 million -- since 2017. However, this is solely due to a non-cash write-off for the $1.8 billion spent on acquisitions in 2021, and so it shouldn't continue to impact results in the coming quarters.
The company's impressive revenue growth is thanks to the fee increase it charges its sellers, which has more than made up for the slowdown in discretionary spending this year. Uncertainty about the economy means fewer people may be looking to spend money now, but the long-term trend for online shopping, particularly for Etsy's unique platform, is still favorable.
The company has doubled the number of active buyers on its platform since 2019. It's also grown its repeat buyers by 8%, and its percentage of habitual buyers has jumped a whopping 223% compared to before the pandemic. Etsy has continued to enhance its platform, introducing new programs to increase ease of use and trust between buyers and sellers and offer more transparency in each transaction. That has helped the company continue to stand on its own, even as competitors like Amazon (AMZN 1.35%) try to compete in the handcrafted, custom product niche.
Etsy is a forward-thinking company that takes careful measures to grow its business without harming shareholder value. It's aggressively repurchasing shares of stock to offset its stock-based compensation for employees, and maintaining a healthy liquidity position with $1.1 billion in cash and cash equivalents. Plus, free cash flow (FCF) has held steady despite the increased costs at the company due to inflation.
Its pricing is elevated, but still a great buy
Etsy's price-to-free-cash-flow ratio, a common metric used to value stocks, is around 26, and its price-to-earnings ratio is 35, indicating the stock is somewhat richly valued. But it's worth noting the company is trading at a P/E ratio lower than those of its e-commerce peers, and at far lower multiples than in the past. Plus there's a lot to say about reporting strong earnings when most other e-commerce stocks are struggling.
Short-term headwinds over the next year or two could curtail its growth slightly, but over the long term this stock is well-positioned to see explosive growth. Etsy, even at today's slightly elevated pricing, is still a fantastic and relatively cheap buy for long-term investors in a fast-growing industry.