While Etsy (ETSY -0.86%) and Figs (FIGS 1.48%) have dropped by 46% and 73% over the past year, each stock offers an investment thesis that could make it an all-star holding.
After reporting decelerating revenue growth in 2022, these businesses have seen many investors run. Yet their underlying operations look poised to continue expanding over the only time frame that matters -- the long term.
Temporarily slower sales growth or not, let's see what makes these two companies potential all-star investments over the next decade.
Etsy
With 95% of its more than five million sellers running shops out of their homes, Etsy's counter-positioning moat versus its massive peers in Amazon and Walmart remains mightier than ever. Counter-positioning moats come from newer business models (such as Etsy's in e-commerce) that would be difficult, if not damaging, for its peers to replicate.
For example, while Amazon has a "handmade" section on its website, it feels like an add-on from a company generating over $600 billion in gross merchandise sales (GMS) annually. Furthermore, if Amazon decided to disrupt Etsy completely, it would end up with a business segment completely disjointed from its core focus on large quantities of commoditized goods with fast delivery times and low prices.
Simply put, Etsy is big enough to bring millions of views to its website and app, yet not too big to take care of its small-time entrepreneurs, enabling their success. Hosting over 180 million unique monthly visitors, the company offers its sellers an incredible sales channel to grow their businesses.
Whether a seller operates exclusively on Etsy or is a Shopify-powered, omnichannel business connected to Etsy, its audience reach makes it an attractive sales channel for any entrepreneur hand-crafting goods.
Naturally, this audience exploded during the pandemic as people shopped from home, with many starting small businesses while locked down. Perhaps one of the best examples of a "pandemic darling," Etsy's stock has been put through the wringer over the last few years.
However, though Etsy's growth has been far from smooth, its GMS is 150% higher than its pre-pandemic levels. Best yet for investors, Etsy boasts a free cash flow (FCF) margin of 17% (even after subtracting stock-based compensation), highlighting promising cash generation that will help fund its global expansion plans.
Removing the company's $216 million in stock-based compensation from its $642 million in FCF over the last year, Etsy trades at 36 times FCF. While this doesn't qualify as "cheap," it is a fair price for a company still growing its small 2.6% share of its market.
Furthermore, Etsy only operates in six countries outside the U.S. and is in the early stages of building its operations in each new region. However, if its 200% GMS growth in Germany since the pandemic is any indicator, Etsy's global ambitions give it the makings of a future all-star.
Figs
While a direct-to-consumer clothing business may not scream "growth stock," colorful scrubs creator Figs has its sights set on conquering the larger-than-expected $12 billion United States healthcare apparel market. Currently commanding a mere 4% share of this industry, Figs has continued carving out its niche in the space, growing sales by 25% in its most recent quarter.
Best yet for growth investors, Figs is eyeing a global healthcare apparel industry worth nearly $80 billion. Already in Canada, the U.K., and parts of Europe, the company recently extended its operations throughout New Zealand, the United Arab Emirates, and Israel so far in the fourth quarter. Buoyed by this expansion, Figs' international sales grew by 49% during the third quarter -- now accounting for 8% of its total revenue.
Furthermore, the company's much lower stock price compared to its 2021 initial public offering makes this international growth all the more exciting for investors. Down 73% in the last year alone, Figs now trades at just 2.8 times sales.
FIGS PS Ratio data by YCharts
Now, if the company were to mature and begin producing a 10% net income margin, it would be trading at 28 times earnings, using today's prices. In fact, just in the fourth quarter of 2021, Figs did record a 10% net income margin despite being in full-growth mode and not fully optimized for profitability.
This combination of early profitability and remaining growth runways domestically and internationally makes Figs a somewhat rare case.
And this all goes without mentioning the company's fastest-growing category: its lifestyle (non-scrubs) apparel. With sales jumping 65% year over year in Q3, the company's outerwear, shoes (through a New Balance partnership), underscrubs, bras, and leggings are rapidly being picked up by healthcare professionals.
Thanks to these geographic and product line expansion possibilities, Figs' deeply discounted price and early profitability make it an up-and-coming all-star to keep an eye on for the long haul.
