Over the past five years, shares of Etsy (ETSY +3.06%) have produced a monster return of 489%, absolutely trouncing both the S&P 500 and the Nasdaq Composite. This means that a $1,000 investment in February 2018 would be worth $5,890 today. That's impressive no matter how you look at it.
But what goes up has since come down. As of this writing, Etsy's stock is down 58% from its all-time high, which was set in November 2021. Does this mean now is an opportune time to buy shares? Let's take a closer look at what investors need to know about this top e-commerce company.
NYSE: ETSY
Key Data Points
Latest results
In 2022, Etsy increased revenue by 10.2%, which showed a major slowdown from the 111% and 35% gains in 2020 and 2021, respectively. Those prior two years were undoubtedly boosted by the pandemic leading to a shift in online spending for physical goods, which was helped by consumers who benefited from government stimulus checks.
Moreover, fourth-quarter net income of $110 million was not only less than what Wall Street analysts were expecting, but it also was down 32.2% year over year. Etsy's operating expenses, including marketing, product development, and general and administrative costs, were up 20.8% compared with the 2021 fourth quarter.
What really stood out for me was that Etsy's 95.1 million active buyers and 7.5 million active sellers (as of Dec. 31) were lower than a year ago. After posting huge user growth during 2020 and 2021, this could be reflective of consumer behavior normalizing following a massive pull-forward in demand.
To be fair, active buyers and sellers were up on a quarter-over-quarter basis, so things could be starting to trend in the right direction. But because Etsy has four marketplaces under its umbrella (Etsy, Reverb, Depop, and Elo7), what CEO Josh Silverman calls a "House of Brands," I'd expect to see active users continue going up. This is something shareholders need to follow to gauge the health of the e-commerce platform.
It shouldn't be surprising that like many other businesses out there, Etsy is dealing with the uncertain macroeconomic environment. Higher interest rates and stubbornly elevated inflation discourage consumers from spending like they would in a more accommodating economy.
And because Etsy's marketplaces skew toward discretionary items, like home furnishings, jewelry, and apparel, these items can be the first to be cut from the shopping list when times are tough and budgets get stretched thin.
In fact, gross merchandise sales (GMS), another key metric to understand how well the business is doing, totaled $4 billion in the fourth quarter, 4% less than a year ago. And management expects GMS of $3.05 billion at the midpoint for the current quarter, which is below what Wall Street was looking for.
Favorable characteristics
While Etsy's operations are facing a slowdown, it's worthwhile to zoom out to gain a better perspective. The company's 2022 GMS of $13.3 billion is 166% higher than pre-pandemic 2019's GMS of $5 billion. Last year's sales of $2.6 billion are more than triple that of three years ago. And the current active user base of 102.5 million is more than double the amount at the end of 2019.
This clearly demonstrates a marketplace that has grown stronger, despite a global health crisis, surging inflation, and macroeconomic headwinds.
And management continues to emphasize Etsy's long-term opportunity. Right now, it considers seven countries -- the U.S., U.K., Canada, Germany, Australia, France, and India -- as core geographies of the business. And within these markets, Etsy estimates that its total addressable GMS opportunity, looking at online retail within the company's relevant product categories, is $466 billion. This means that the runway is extensive should Etsy continue finding ways to gain market share.
Investors should find the company's financial profile extremely attractive. Gross margin has been north of 70% for the past three years. And the business is a cash machine, generating close to $2 billion in free cash flow during the last 36 months. In today's uncertain market environment, being on solid financial footing is something to be prioritized.
Although its shares are up 20% in the last six months, Etsy is trading at a price-to-earnings ratio of under 36. This is about half the average valuation of the past five years. It might be time to consider buying the stock while it's well off its peak.
