Etsy (ETSY 4.03%) was all the rage in the throes of the pandemic, when people were stuck at home and had plenty of time for online shopping. The website for craft-oriented creations drew enormous interest from buyers and sellers alike to its platform in 2020 and 2021 -- a tremendous boon for the stock.

With the world easing its way back into pre-COVID-19 normalcy, however, Etsy shares have lost much of their luster. They're currently trading 30% below February's high, and are down a whopping 66% from their late-2021 peak on (legitimate) worries the company wouldn't be able to maintain its red-hot growth pace.

As it turns out, the doubters were technically right -- except the bears have arguably overshot their target, and that translates into opportunity for investors looking at the future rather than remaining fixated on the past.

The two-pronged bull case for Etsy

There is some sense to investor worries. With consumers going out more, money getting tighter, and competitive threats growing, investors have begun to have doubts about Etsy's future performance. Some analysts have as well. Jefferies analyst John Colantuoni double-downgraded the stock from a buy rating to underperform just last month on worries of newly slowing consumer spending, suggesting Etsy shares' rich valuation is no longer justified.

But the stock's recent detractors are failing to notice two key details about this company. The first of these is that the quirky online shopping site is still being fine-tuned. For example, the platform's search feature underwent overhauls last year, finally allowing an "add to cart" button to be added on a user's search results. This option allows a shopper to bypass steps that might result in an abandoned purchase before a sale is completed.

It's just one evolution, of course, but is still an example of many insightful steps CEO Josh Silverman is driving in an effort to generate more buying. Another example: The company also now monitors changing search trends at Etsy.com, and then redirects its efforts accordingly. During the pandemic, it told its sewing sellers how to make face masks, and it now knows searches for travel planners and travel bags are up in a big way as vacationing resumes.

These are little details that can be used to better monetize the site in a big way. As CFO Rachel Glaser put it during February's earnings call, "You can't stop the waves, but you can learn how to surf."

The second noteworthy detail being overlooked by the stock's recent sellers is while it's never going to draw the kind of crowd Amazon does, Etsy does have a growing base of increasingly active customers. A recent Piper Sandler study indicates Etsy reactivated 24 million of its dormant customers in 2022, breaking an annual company record. That growth also suggests Silverman, Glaser, and the rest of the management team are finding a winning formula for keeping shoppers interested.

Perhaps most intriguing of all is who loves Etsy the most. That's Gen Z -- the digital-native teenagers who have never lived in a world with broadband internet, and most of whom don't remember a world without smartphones. Piper's recent survey of this demographic indicates Etsy is one of this generation's preferred shopping venues because it offers these young consumers the personalized offerings they want. It also allows them to participate in the global sustainability movement by buying secondhand goods.

Expect it when it's least expected

It's not a perfect pick, to be fair, since there's no such thing -- every investment prospect has its downside. Jefferies' Colantuoni may well have identified Etsy's top liability, which is the stock's steep valuation. Shares are trading at nearly 40 times this year's projected profits, and roughly 30 times next year's expected per-share earnings. That's not cheap for any company facing a sales slowdown.

But Etsy's current revenue slump is likely only a temporary one. The analyst crowd collectively anticipates a reacceleration of sales and earnings next year, with more of the same pace of double-digit growth beyond that. It's the kind of growth that drives a stock higher sooner than later -- and usually sooner than later.

Chart showing Etsy's sales and earnings growth are expected to accelerate beginning in 2024.

Data source: Thomson Reuters. Chart by author. All figures are in millions of dollars.

The bottom line is that this recent pullback (following last year's even bigger rout) is an entry opportunity. It's taken Etsy longer than it should have to find its groove. It's finding it now, though, and it's doing so at a time when few are expecting to see it happen. That dynamic only bolsters Etsy stock's potential upside.