Etsy (ETSY 3.38%) shareholders have been on a roller coaster over the past few years. In just over three years, Etsy's stock has gone from $40 to nearly $300 before dropping to its current $125 share price. This rapid movement isn't uncommon as multiple stocks have seen the same rise-and-fall action since 2020.

However, recent business trends have me wondering if I should sell my Etsy shares. A few key indicators are moving in the wrong direction, and 2023 may not be an easy year for the company. So let's dig in and see if Etsy shares are worth holding on to now.

Revenue growth won't last if current trends continue

Etsy is the market leader for customized goods. Whether you want a custom neon sign with your name, a handcrafted leather bag, or a unique t-shirt, an Etsy seller likely has you covered. Etsy's popularity exploded during the pandemic, with its active buyers nearly doubling in three years.

However, that popularity seems to be wearing off. In the fourth quarter, active sellers and buyers both declined. This is especially concerning as Q4 holds the most crucial retail time of the year. Fewer users caused gross merchandise sales (GMS) to decline by 4% over last year's figure to $4 billion.

Still, Etsy managed to grow revenue by 12.6%. How did it accomplish this? Higher fees and increased ad revenue.

Chart showing how Etsy's revenue grew in Q4 2022.

Image source: Etsy.

In April 2022, Etsy raised its seller's fee from 5% to 6.5%. Once Etsy laps this date, revenue growth will be closely linked to GMS growth (or decline). Considering the trend of GMS, sellers, and buyers, it's not looking good for Etsy.

That's just the top line of Etsy's financials, but it doesn't get any better on the bottom line, either.

Margins are suffering thanks to increased expenses

Operating expenses rose faster than revenue in Q4 to the tune of 20.8%. Etsy management should know that revenue growth would weaken, but they are still increasing expenses. However, there are some critical indicators within that number that investors should understand.

Operating Expense Item YOY Increase
Marketing 19.9%
Product Development 48.7%
General and Administrative 6.7%

Data source: Etsy.

It's pretty disappointing to see Etsy's marketing spending rise nearly 20% yet deliver negative GMS growth, especially considering that the advertising market is weak now, so ads should cost less. However, given the rapid increase in product development expenses, the company is clearly working on the "next thing" to help its business -- likely its advertising offering.

Still, the additional ad revenue wasn't enough to help Etsy's profitability as its profit margins continued to tumble. If Etsy's profit margin dips below its 2019 levels, that will be a huge red flag for the stock. But are these facts enough for me to exit my Etsy position?

Year Q4 Profit Margin
2019 12%
2020 24%
2021 23%
2022 14%

Data Source: Etsy. 

While its valuation has fallen, the stock isn't undervalued

Although valuation alone is never a reason to buy or sell a stock, it can help investors decide if the company is unrealistically undervalued due to pessimism.

ETSY PE Ratio Chart

ETSY PE Ratio data by YCharts

Even though Etsy is trading below its average price-to-sales valuation, that includes a period where it was drastically overvalued. Etsy is probably trading at or slightly above what its valuation should be, leading me to believe the stock isn't suffering from exaggerated pessimism yet.

So what am I going to do? I'll likely trim some of my Etsy position with how the business is trending. I think outright selling the whole position is a mistake as Etsy still has potential. But other investments look more intriguing with more significant return potential, so I'll likely use the Etsy proceeds to establish a position in a company with a brighter outlook.