Etsy (ETSY -1.75%) stock investors have been on a wild ride so far in 2023. Shares had been up by nearly 20% by early February but are now in negative territory for the year. Major Wall Street worries include slowing consumer spending patterns, which might pinch sales and earnings for the e-commerce platform.

But Etsy has a good shot at generating solid long-term growth if it can continue winning market share while expanding the services it provides to its merchant partners. Let's take a look at whether that bullish thesis makes the stock a compelling buy today.

Finishing strong

Etsy's last earnings report showed solid momentum into early 2023. Sure, merchandise volumes declined 4% in the fourth quarter compared to booming growth a year ago. The company also shed buyers year over year, as consumers became less interested in e-commerce compared to earlier phases of the pandemic.

Yet the marketplace is outperforming peers and steadily increasing its scale. Rival eBay lost 9% of its buyer base in Q4, for example, compared to Etsy's 1% decline. eBay's sales volumes were down 6%, too, after accounting for currency exchange rate shifts. On the other hand, Etsy managed just a 1% decline on that basis. While both companies are enduring a growth hangover today, Etsy has a clearer path back toward accelerating sales trends.

Etsy's improving results

Etsy's financial strength is lacking, but there are good reasons to expect progress here as well. The company reported a $700 million loss for 2022 compared to a $500 million profit a year earlier. Its operating margin is below eBay's, which is a more established business.

ETSY Operating Margin (TTM) Chart

ETSY Operating Margin (TTM) data by YCharts

Investors can view this performance gap as a positive, though, because it suggests Etsy has room to improve key metrics like profitability and cash flow. Free cash flow was higher in 2022, for example, despite slowing sales growth. Etsy generated $650 million in free cash flow last year, while eBay's annual haul is closer to $2.2 billion.

Looking ahead

Etsy stock is cheaper than it has been through most of the pandemic. Investors are paying about 5.6 times sales for shares today while the price-to-sales (P/S) ratio had been closer to 20 by late 2021.

It's true that Etsy's short-term growth prospects seem much weaker now than they did at that time. Most Wall Street pros project that sales will expand by about 8% this year after having expanded by 10% in 2022.

There's a lot to like about this growth stock, though. Etsy is building scale in a huge industry. Its margins are likely to move closer toward eBay's, especially given the boost from recent merchant fee increases. Sure, there will be bumps along the way, and a recession in 2023 or 2024 would likely mean weaker short-term results.

But Etsy isn't facing a major financial crunch or declining sales today. And its cheaper stock valuation reduces the risk involved with holding a company that's early on in its expansion plan. Overall, investors should consider buying shares in this high-performing business. Stock prices can always drop lower along with the wider market. But Etsy appears poised to be a much stronger business several years from now than it is today.