Industries like streaming entertainment, digital payments, and online shopping were huge winners because of the coronavirus pandemic. Etsy (ETSY -0.86%), for example, added a tremendous number of users to its platform, boosting sales and profits to record levels. The stock rose by a whopping 570% between the start of 2020 to its all-time high in November 2021.
But with that pandemic-generated business surge behind us, consumer behavior in a normalization period, and heightened macroeconomic uncertainty, Etsy shares have been under immense pressure. The popular e-commerce stock is down 24% over the past 12 months and 64% off its peak. Where will Etsy stock be a year from now?
Etsy experiences a slowdown
In 2022, Etsy's revenue increased 10.2% to $2.6 billion. This marked a sharp deceleration from its growth rates of 110.9% and 35% in 2020 and 2021, respectively. And management's move to raise the fees charged to sellers bolstered the 2022 figure. Etsy's gross merchandise sales last year slid by 1.3% to $13.3 billion, signaling a notable flattening of interest in the online marketplace.
Even more alarming was the fact that Etsy's user base shrank during the year. As of Dec. 31, the business had 7.5 million active sellers and 95.1 million active buyers on its platform, both down roughly 1% year over year. To Etsy's credit, though, its user base did expand slightly compared to the third quarter. Whether the key issues are macro factors or difficult year-over-year comparisons (or both), Etsy is now dealing with a different environment than it was in 2020 and 2021.
For the first quarter, management forecasts revenue of $600 million to $640 million, good for a respectable 7.1% year-over-year jump (at the midpoint). The leadership team called out a shift in consumer spending as a reason why they are tempering their expectations for the rest of this year. Wall Street foresees sales rising 8.1% in 2023.
Proceed with caution
Even with the 23% drop in Etsy's share price over the past year, it still trades at a forward price-to-earnings (P/E) ratio of 28. While this is significantly below the stock's three- and five-year averages on that metric, it is still more expensive than e-commerce peer eBay, which trades at a forward price-to-earnings ratio of just 10. Etsy is also valued at a premium relative to the tech-heavy Nasdaq 100 index.
The macroeconomic picture couldn't be any more unclear at this point. Inflation may be down from its 2022 peak, but it's still high, which pinches the discretionary income that consumers have available to spend on the types of products that Etsy specializes in. And even in the face of troubling banking issues, the Federal Reserve still hiked interest rates again when it met Wednesday. It's hard to predict what will happen with the economy throughout the remainder of the year, but a recession could well be on the horizon.
How, then, should investors think about Etsy's business and stock with this perspective in mind? I believe the best approach right now is to be cautious. The company's 2023 outlook shows a dramatic slowdown compared to the gains that Etsy was putting up in previous years -- numbers that shareholders fell in love with. Making matters worse, it's increasingly looking like the economic situation will remain rocky in the near term.
However, for those investors who can look past these issues, Etsy might look like an attractive stock to own over the long term. This is a competitively advantaged and profitable enterprise that provides a differentiated merchandise offering to its customers. What's more, e-commerce spending in the U.S. as a share of overall retail spending remains relatively low, giving Etsy a potentially long growth runway. Riding a broader secular trend can work wonders for any business.
All of this is to say that 2023 might prove to be another difficult year for the stock and the company from an operational perspective. But when the economy stabilizes and consumer confidence is stronger, there's a chance that Etsy's stock could approach its former highs once again.
