If I Could Only Buy 1 Stock, This Would Be It

This year has undoubtedly been a difficult one for investors in the stock market. Most of the past decade has been characterized by loose and accommodative monetary policy, which provides a favorable environment for equities to rise. The reversal has happened in 2022, and many investors are rightfully wondering where to park their hard-earned cash. 

The good news is that I still see attractive opportunities out there. If I could buy only one stock right now, it would be Etsy (ETSY -0.19%). Here's why. 

Impressive financial profile 

Etsy isn't immune to the macroeconomic pressures facing many other businesses right now. The business posted revenue of $594.5 million in its most recent quarter, up 11.7% year over year. But the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) dropped to 28% from 33% in the year-ago period due to higher product development costs and a larger headcount. 

Etsy otherwise possesses impressive financials. Since the business operates online marketplaces that simply connect buyers and sellers, of which there are 94.1 million and 7.4 million (as of Sept. 30), respectively, Etsy carries no inventory itself. This results in a successful capital-light business model. 

Etsy's gross margin in the third quarter was a remarkable 70.7%. And the company's operating margin, now at 15.3%, has expanded from 8.6% five years ago in the 2017 third quarter. Etsy has proven its ability to scale extremely well, and this has worked wonders for profitability. 

Another important characteristic that the company possesses is its pricing power. In April, Etsy increased the fee it charges sellers from 5% to 6.5%. While this move was initially met with a boycott from some of Etsy's sellers, the business has historically had no trouble implementing fee hikes. Sellers, many of whom are independent entrepreneurs, clearly see the value that Etsy provides for their small operations. And for Etsy, this results in a higher take rate, or money it keeps from all the sales occurring on its platform. 

All of this is to say that Etsy generates a lot of free cash flow (FCF), to the tune of $646 million over the trailing 12 months. And this favorable situation is something investors should put a premium on. This is especially true in this type of economic environment where access to capital is restricted. Companies that don't need outside capital to operate and grow, like Etsy, have an advantage. 

Sizable growth opportunity 

Etsy's management team, led by CEO Josh Silverman, believes the business has a total addressable market of $466 billion in its relevant product categories for online shopping in its seven core geographies, which include the U.S., U.K., Canada, Germany, Australia, France, and India. Based on Etsy's gross merchandise sales (GMS) volume of $13.5 billion over the past four quarters, there is clearly a huge runway for expansion in the years ahead. 

What's impressive is that over the past five years, Etsy has increased its revenue at a compound annual growth rate (CAGR) of 45% between 2016 and 2021. While it's probably not likely that the enterprise will continue growing at such a rapid clip over the next five years, the fact that Etsy currently only commands under 3% of its total addressable market (based on GMS) is quite remarkable and demonstrates that the opportunity for expansion is huge. 

According to data provided by Statista, e-commerce only represents about 20% of overall retail sales in the U.S. today. And this was after the pandemic led many to shop online more. 

Additionally, Silverman believes that "in a world of mass commodities supplied by companies obsessed with speed and scale, Etsy is the antidote." He went on to say, "Etsy offers something different, and we've continued to invest to bring even more joy to the very human experiences of selling and buying on Etsy." 

A sizable runway for online shopping to take share from physical shopping, coupled with consumer interest in supporting small businesses and seeking out special and unique items, supports Etsy's prospects. 

Attractive valuation 

Although shares have soared 85% over the past six months, Etsy's stock is still down 40% on the year. This translates to a price-to-FCF of just 29 today. This valuation is far lower than the stock's historical five-year average of 41. 

As the Federal Reserve continues its rate-hiking policy to curb inflation that is still at elevated levels, investors have flocked to safer investments. And this dynamic has hurt growth tech stocks like Etsy tremendously. But for those investors that can take a step back and focus on the bigger picture, the stock looks like a good buy right now.