Etsy (ETSY 2.86%) was a Wall Street darling during the worst of the pandemic as online shopping took off with brick-and-mortar retailers largely shuttered. The stock climbed 302% in 2020 and 23% in 2021, only to plummet 45% last year.
Investors are considering what the future holds for this lagging e-commerce favorite. As we look toward the rest of 2023, let's consider both the bull and bear cases for Etsy stock.
What the bulls say
I would argue that the main bullish case for Etsy centers on how differentiated its offering is. A survey done by the company showed that 87% of shoppers said it has items that they can't find anywhere else.
Having unique merchandise helps explain why the number of habitual buyers -- those with six purchases and over $200 in spending during the past 12 months -- has more than tripled in the past three years. This also protects it from an e-commerce behemoth like Amazon.
Furthermore, Etsy benefits from a competitive advantage known as a network effect. Essentially, this means that the value of the platform increases for users as it gets bigger.
This makes sense. As more buyers turn to Etsy for their needs, shoppers gain a growing base of customers. And as more merchants set up shop and make their products available on Etsy, shoppers are exposed to a larger number of purchasing options.
Network effects make it harder for competitors to stand out. Why would buyers and sellers go anywhere other than the most robust marketplace? The result is a positive feedback loop where growth begets growth.
This explains Etsy's remarkable financials. Between fiscal 2016 and fiscal 2021, revenue increased at a compound annual rate of 44.8%, while profitability absolutely skyrocketed. In fiscal 2016, Etsy posted a net loss of $30 million; by fiscal 2021, this figure transformed to a profit of $494 million.
While Etsy is facing a slowdown due to difficult year-ago comparisons and general macro weakness, these positive attributes make it a worthwhile investment.
What the bears say
Speaking of a slowdown, bears can make the argument that Etsy was simply a pandemic play whose best days are in the past. As many sellers offered face masks during the depths of the pandemic, gross merchandise sales surged, up 106.7% in 2020 and 31.2% in 2021.
Looking ahead, it's probably a safe assumption that Etsy's growth won't be as spectacular as it has been. In fact, e-commerce sales as a percentage of overall retail sales have plateaued in the U.S. in recent quarters.
And the trend with Etsy's user base might reflect this pattern. In the third quarter (ended Sept. 30), the number of active buyers and sellers both declined on a year-over-year basis, something that hasn't happened before. Maybe this is a normalization period following the pandemic-fueled boom. Or maybe it's a sign that Etsy's days of rapid expansion are nearing an end.
A shrinking user base is even more alarming when you consider that the reported figures include Etsy's other marketplaces as well. Even after integrating newer specialized marketplaces, active users dropped.
Depop and Elo7 are two of those other marketplaces that were acquired by Etsy for a combined $1.8 billion in 2021. These purchases had to be written down in the latest quarter, resulting in a $1 billion impairment charge.
Naysayers could contend that the management team, led by CEO Josh Silverman, doesn't possess the necessary skill set when it comes to capital allocation, as it is now evident by the fact that Etsy seriously overpaid for Depop and Elo7.
By now, you have a little more information about both sides of the aisle for Etsy, which should help inform your investing decisions about the stock.
