With brick-and-mortar retailers temporarily shuttering locations during the depths of the coronavirus pandemic, consumers turned to online shopping. And Etsy (ETSY 1.18%) was a major beneficiary, being able to quickly respond to surging demand thanks to its broad assortment of unique merchandise. The stock was up 302% in 2020 and 23% in 2021.
Then things took a turn for the worse last year as consumers returned to physical stores and investors soured on Etsy's stock. Shares were down 45% in 2022. But Etsy is on the rise again. As of Jan. 25, the stock is up 14% so far this year. Still well below its all-time high, here's why Etsy is a top e-commerce stock to buy in 2023.
NYSE: ETSY
Key Data Points
Facing some headwinds
Etsy posted stellar revenue and gross merchandise sales (GMS) growth of 35% and 31%, respectively, in 2021. But there's no denying that the business has been dealing with some headwinds that began last year.
For starters, Etsy is facing difficult comparisons. The pandemic was a boon for e-commerce activity, and Etsy was there to capitalize on this shift in consumer behavior. Unsurprisingly, face masks were a key product that buyers wanted. And when vaccination rates started rising, the need for masks dwindled.
Additionally, in 2020 and 2021, Etsy attracted an incredible number of users onto its platform. In those two calendar years, the company brought on 4.8 million sellers (up 178% in two years) and 49.9 million buyers (up 108%), which was just unprecedented growth. In the most recent quarter (third quarter of 2022, ended Sept. 30), the number of active buyers and sellers declined on a year-over-year basis.
It doesn't matter what type of business it is -- it's hard to register gains on top of those impressive numbers. And consumer behavior could simply be normalizing following the growth spurt.
Making matters worse is the softening macro environment. The Federal Reserve's ongoing fight against inflation has cast a shadow of worry about where the economy is headed in 2023. Some are certain that a recession is on the horizon. Whether it's mild or severe is anyone's guess. Consumer confidence has steadily increased over the past several months, but it is still significantly below historical averages.
Etsy could fare poorly in a recessionary environment because of the merchandise that is sold on its marketplaces. The company specializes in things like home furnishings, jewelry, and apparel, items that shoppers could put on hold when they're trying to conserve cash. Management is accepting this reality, as they guided fourth-quarter revenue to rise 3.2% (at the midpoint) compared to Q4 2021, with GMS down 9.5% (at the midpoint).
For the current year, Wall Street consensus analyst estimates call for 9.5% top-line growth. This is still healthy considering the economic environment, but it is no doubt a huge deceleration from what shareholders are used to seeing from Etsy.
Long-term opportunity
Despite what appear to be some sizable headwinds facing Etsy specifically, and the e-commerce industry generally, it's hard to ignore the company's favorable characteristics. Most notable is the asset-light nature of its business. Because Etsy doesn't own or manage any inventory itself, simply extracting fees from the purchasing activity that happens on its marketplaces, the company can generate tremendous profitability.
Excluding 2022's figures, which were impacted by investments in headcount growth and a one-time goodwill impairment charge, Etsy's gross and operating margins have expanded substantially over the years. What's more, Etsy is a cash-generating machine.
And according to its management team, Etsy still has a long growth runway in the years ahead. They estimate the company's GMS opportunity (within online shopping in its core geographies and relevant product categories) to be $466 billion. Compared to Etsy's 2021 GMS of $12 billion, that is a massive total addressable market to continue penetrating.
Even after Etsy's stock has climbed 38% over the past six months, shares trade at a price-to-earnings multiple of 36, about half the stock's trailing-five- and 10-year valuations. Shares still remain 55% off their all-time high. For long-term investors who can look past the near-term headwinds, Etsy definitely deserves a closer look.
