Shares of eBay (EBAY +0.94%) and Etsy (ETSY +2.10%) are down from their highs set in late 2021, just before the market started heading lower. The S&P 500 has declined roughly 14% since then, but eBay has shed over 35%, while Etsy is lower by 40%.
The cheaper valuation could set investors up for solid long-term returns if these e-commerce platforms can return to their prior pace of steady growth in both sales volumes and earnings.
So let's look at which of the two stocks makes the better buy right now.
Etsy is still in growth mode
The main difference between the two stocks is that Etsy is earlier on in its growth journey.
While both companies have seen slowing sales trends in recent quarters, eBay is having trouble holding on to much of the gains it saw in earlier phases of the pandemic. It shed 11% of its buyer pool last quarter and 12% in the prior quarter. Etsy, on the other hand, posted a 1.9% drop in its comparable figure for the third quarter.
NYSE: ETSY
Key Data Points
Etsy also appears to have a good shot at generating stronger earnings growth. The platform's focus on less-commoditized products supports a higher fee structure, with a take rate that today approaches 20% of sales; eBay's take rate is 12.8% of sales .
eBay has more financial flexibility
You might still prefer eBay's stock for its financial strength. With its larger, more diverse sales base, eBay is less exposed to large revenue swings. Even though volume was down 11% last quarter, for example, revenue only declined by 5%.
eBay has also established sustainable free cash flow; whereas, Etsy is directing nearly all its excess cash back into growth initiatives.
ETSY Stock Buybacks (TTM) data by YCharts. TTM = trailing 12 months.
That difference helps explain why eBay can spend so aggressively in areas like stock buybacks and a growing dividend. Your returns while holding Etsy will depend more on its operating performance, which likely means extra volatility in comparison with eBay.
Cheaper isn't always better
eBay is also the cheaper alternative, with shares trading at less than 3 times annual sales, compared to Etsy's 7.8. More value-focused investors will like that discount, especially given that eBay is more profitable and pays a dividend.
If you can be patient and don't mind higher volatility, though, Etsy could be the better buy. Sure, it will be a while before the full earnings power of this platform is clear. The company might be hit hard if a recession develops in key markets like the U.S., too.
But Etsy has a higher potential to dramatically expand its sales base over the next decade. And there's no reason why management couldn't start delivering more cash to investors in a few years, just like eBay does today through a dividend and stock buybacks.
You're taking on more risk with an Etsy purchase compared to eBay. Growth-focused investors should be happy to do that, though, given the businesses' attractive prospects for market share gains over the next several years.
