Etsy (ETSY -0.19%) has been a fantastic growth stock over the past 10 years. Its 21% annualized return more than doubled the return of the S&P 500 during that same period.

But like most online retailers, 2022 has been a tough year for the e-commerce platform. The stock sits down 40% this year, largely due to the overall bear market and also investors' growing concern over the cooling economy.

Investors eyeing this growth stock at today's beaten-up pricing may be wondering if it has what it takes to bounce back in the coming year. Here's why Etsy could not only bounce back in 2023 but soar over the long term.

A class of its own

Etsy's focus on handcrafted products and specialty goods puts it in a class of its own compared to other e-commerce stocks. Since 2019, the Etsy marketplace has more than doubled its number of active buyers to 94.1 million. Its rapid growth was undoubtedly thanks to the online shopping boom spurred by the global pandemic, but the company believes its growth momentum will continue well into the future.

Etsy estimates it's only saturated around 2.6% of its current total addressable market (TAM). And prior acquisitions of Reverb, Depop, and elo7 are helping it reach entirely new markets and customers.

Gross merchandise sales (GMS) on the platform were down 3.3% year over year in the third quarter, but revenue was still up 11.7% thanks to an increase in transaction fees the company implemented earlier this year. Its free cash flow (FCF) is up 234% over the last three years, while other e-commerce stocks like Amazon and Shopify have seen FCF drop notably. 

The company has also proven its ability to adapt quickly and improve its services to attract and retain buyers and sellers. Its "Right to Win" initiative has introduced things like improved messaging, which helps buyers and sellers communicate easier, transparency in shipping timeline and fees, improved search features, and adding discovery features to highlight selling points of products and shops to reach new customers.

Focus on the long term 

The most recent Producer Price Index report from the Labor Department rekindled investor worries about inflation. It seems that even with the Federal Reserve's aggressive hikes this year, some prices are still rising faster than hoped.

That could mean 2023 will be another sluggish year for Etsy, which relies on discretionary spending from consumers to grow. But investors shouldn't focus solely on the short-term headwinds the company is facing. Instead, they should look to the massive long-term potential for Etsy.

The stock has rebounded 26% in the past three months, while the S&P gained just 3%, so the stock is already on the right trajectory for the new year. Its fourth-quarter earnings, particularly with results from the holiday shopping season, can also give Etsy a strong start to 2023.

Right now, the stock is trading with a 6.1 times forward price-to-sales (P/S) ratio. This is somewhat pricey, considering e-commerce giant Amazon is trading around 1.7 times sales. However, if you consider that no other e-commerce company offers the niche marketplace Etsy does as profitably or at the same scale, its premium pricing makes it a worthwhile investment and a fantastic buy before the start of 2023.