In the world of online shopping, no one dominates quite like Amazon. The tech behemoth generated revenue of $514 billion in 2022, and it's likely already in many readers' portfolios today, given just how well-regarded the company is. But there are some under-the-radar businesses leveraging the power of the internet to deliver goods to shoppers. And they deserve some investor attention.
So which is the better e-commerce stock to buy now: Carvana (CVNA 8.79%) or Etsy (ETSY 0.34%)? Let's take a closer look at these two niche-focused online retailers.
The case for Carvana
Carvana is a disruptor to the outdated used-car retail market, leaning on its technology, data, and software advantages to deliver a far superior customer experience. Revenue has soared from $858.9 million in 2017 to $10.8 billion in the first nine months of 2022, demonstrating monster growth.
But the company hasn't been immune to unfavorable external factors. Most notably, higher interest rates have made cars less affordable for shoppers, hurting demand for Carvana. And with a debt load of close to $7 billion compared to cash on the balance sheet of $316 million, shareholders are concerned about the business's solvency. It's been widely publicized by now just how precarious Carvana's financial situation is. Not too long ago, a group of the company's creditors signed an agreement to collaborate in case any financial restructuring happens -- not a promising sign, to say the least.
It's hard to overstate just how gargantuan Carvana's opportunity is. It is estimated that 43 million used cars are sold in the U.S. each year, with a total market size of roughly $1 trillion. Based on its trailing-12-month retail units sold of 438,000, Carvana currently commands just a tiny 1% share of the industry today. As buying cars online becomes more popular and normalized, like buying other products online has become, Carvana's growth could skyrocket.
Although Carvana shares are up 133% in 2023, they are still down a whopping 97% from their all-time high set in August 2021. So investors can own the stock right now by paying a super-cheap price-to-sales multiple of 0.07. Despite this compelling valuation, investors must understand the risk that Carvana could be teetering on the brink of bankruptcy if it can't navigate the macro situation.
The case for Etsy
Etsy operates four marketplaces that match buyers and sellers of unique and handcrafted goods. These include the namesake Etsy marketplace, as well as Reverb (musical instruments), Depop (secondhand clothing), and Elo7 (the Etsy of Brazil). What really stands out here is the product differentiation. According to a survey, 87% of Etsy buyers said the company offers items they can't find elsewhere, which is a key competitive strength.
Revenue in the most recent quarter (Q3 2022 ended Sept. 30) was up 11.7% year over year. And in the quarter, Etsy's gross merchandise sales (GMS) of $3 billion was down 3.3% versus the prior-year period. While this might be worrisome, it's still 150% higher than in the third quarter of 2019, before the pandemic.
Etsy's broad geographic reach and focus on a variety of different product categories mean its total addressable market is gigantic. In the business's seven core geographies -- the U.S., U.K., Canada, Germany, France, Australia, and India -- management believes the GMS opportunity to be $466 billion, leaving a huge growth runway in the years ahead.
As of this writing, Etsy shares are currently trading hands at a price-to-earnings (P/E) ratio of just under 36, which is cheaper than the trailing three-, five-, and 10-year average valuations. While this multiple might not immediately scream bargain, it's worth mentioning the price might be warranted, given Etsy's strong past growth and future prospects and the company's outstanding financial profile. Etsy is a cash machine, and in this type of uncertain economic environment, that might be worth paying up for.
The winner
Considering all factors, I'd have to go with Etsy as the better investment right now. While Carvana undoubtedly has much greater upside if it can navigate the near-term financial challenges and continue gaining market share in the massive domestic used car market, there is just too much uncertainty and volatility to stomach. On the other hand, with its stellar financial profile and still-huge expansion runway, Etsy looks like the better stock to pick.
