This year hasn't been very friendly to Etsy (ETSY -2.35%), whose shares are down a jaw-dropping 42% this year (as of Dec. 23), despite a rally over the past several months. The popular online marketplace for unique, vintage, and handcrafted goods is facing a noticeable slowdown, thanks partly to the macroeconomic picture. 

Regardless of what's going on with inflation or interest rates right now, where will Etsy's stock be in three years? Let's take a closer look at this top e-commerce business. 

Pandemic hangover 

Unsurprisingly, Etsy absolutely flourished thanks to the coronavirus pandemic. Consumers, flush with stimulus cash and not spending as much on travel or other entertainment options, flocked to online shopping. Offering face masks, as well as numerous other in-demand product categories, was a boon for Etsy. Gross merchandise sales (GMS) jumped 106.7% in 2020 and 31.2% in 2021 on a year-over-year basis. And revenue soared 110.9% and 35%, respectively, in those two years. Times were good. 

But this year has been a different story. In the first nine months of 2022, Etsy's GMS was essentially flat, with revenue up just 9.1% compared to the same period in 2021. And the adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin compressed from 33% in Q3 2021 to 28% in the latest quarter. 

What really stood out in Etsy's third-quarter results (ended Sept. 30) was the fact that the business reported a decrease in both active buyers (down 1.9% to 94.1 million) and active sellers (down 0.9% to 7.4 million). Not only is this in stark contrast to the growth that shareholders have been accustomed to seeing in prior years, but it might be even more cause for concern given these figures incorporate all of Etsy's marketplaces (Etsy, Reverb, Depop, Elo7).  

At first glance, a shrinking user base might seem like a reason to panic. But I think shareholders should remain calm. Etsy is lapping the tremendous growth it registered in the past two years, so I'm not surprised to see the number of active buyers and sellers fall slightly. Consumer behavior is normalizing a bit, causing many to resume their shopping habits in person. 

According to Digital Commerce 360, a research service, U.S. e-commerce sales grew 10.8% in Q3 on a year-over-year basis. While this is a healthy gain, it pales in comparison to the more-than-44% growth it posted in four straight quarters during the depths of the pandemic. What's more, the growth figures are still catching up to pre-pandemic levels. And this helps to somewhat explain Etsy's slowdown. 

Large market opportunity 

If we zoom out a bit, though, we will see how remarkable Etsy's performance has been over a longer time scale. Over the past three years, Etsy's stock has climbed 184%, easily crushing the Nasdaq Composite Index during the same time. With higher GMS and revenue, profitability has also soared. 

The next three years might not exactly resemble the past, but this isn't something shareholders should worry too much about. The management team estimates that Etsy's total addressable market (for GMS) is in the neighborhood of $460 billion, which is a gargantuan amount by any standard. For comparison's sake, Etsy's GMS this year is projected to total roughly $13 billion. 

However, the possibility of a recession in the near term poses a critical risk. Etsy's marketplaces lean toward discretionary items, and these can be put on hold by consumers when times are tough and budgets are being stretched thin. For example, Etsy specializes in things like jewelry, apparel, and home furnishings -- not quite essential items. Plus, it'll be difficult to encourage repeat purchase behavior in a recessionary scenario. 

"While the year may start off slowly, we are optimistic for growth to resume in 2023, unless macro headwinds intensify," CFO Rachel Glaser pointed out on the Q3 2022 earnings call. Management is also uncertain how exactly the holiday-shopping period will play out. 

Investors who can look past the short-term uncertainty and focus on the next few years might find the stock a compelling buy today. Etsy's valuation, as measured by the price-to-earnings (P/E) ratio, is currently under 36. This compares quite favorably to the trailing five-year average P/E of 67. An attractive valuation, coupled with a huge growth runway ahead, makes Etsy a potential portfolio addition right now, even when considering the economic situation.