Wall Street isn't a fan of e-commerce stocks right now. Most companies in the industry have seen slumping share prices on fears of a growth slowdown ahead as consumer spending trends weaken.
Worries are more acute for companies that were losing money in 2022, as they are the most exposed to pressures from the rising cost of debt.
Shares of Etsy (ETSY -2.73%) were hit hard over the last year due to these concerns. The stock is down nearly 40% since early 2022, in fact.
But the business is outperforming peers and has a good shot at producing strong returns over the next several years. Let's look at some good reasons to buy the marketplace stock today.
Sure, Etsy isn't growing at nearly the same blazing pace as investors saw in earlier phases of the pandemic. Sales volumes rose by less than 1% in the most recent quarter. In context, though, that uptick isn't nearly as disappointing.
Consider that Etsy was growing on top of an 18% spike a year earlier and a 119% surge two years ago. It is also outperforming eBay (EBAY -0.29%), which recently posted a 5% volume decline.
It's no surprise, then, that management is thrilled with the broader growth picture. "We believe our sustained performance is a testament to Etsy's unique position in e-commerce," CEO Josh Silverman told investors in early November.
Etsy's finances are also stronger than its recent losses imply. Yes, net losses soared to nearly $1 million last quarter, or almost 33% of sales. But that red ink was entirely due to a one-time impairment charge tied to some recent acquisitions. Look at the continuing business, and you'll see some impressive financial trends.
Gross profit margin is up in the nine months that ended in late September, and adjusted profit margin is holding steady at roughly 30% of sales (it was 31% a year ago and 28% today). Etsy has found room to raise the fees it charges sellers to nearly 20%, compared to eBay's take rate of 13%.
The bullish thesis for this stock depends on that take rate continuing to stay strong, which means Etsy will need to steadily add to the services it provides to sellers. The company also needs to keep attracting more buyers to the platform, which is becoming harder here in early 2023 – especially compared to the booming growth over the last two years.
Still, investors are getting a nice discount in exchange for signing up for some potentially weaker results over the next few quarters. You can own Etsy stock for less than 8 times annual sales compared to its peak valuation of about 18 times revenue. For comparison, eBay sells for about 3 times sales, in part because it has a much more mature business and a weaker growth profile.
Investors who are worried about volatility over the next few quarters might not prefer Etsy stock since short-term returns will be sensitive to economic swings. But if you like growth stocks with the potential for expanding profit margins, then you should take another look at this highly efficient tech company.