As a huge beneficiary of the coronavirus pandemic, Etsy (ETSY 1.23%) saw its sales and customer base skyrocket when people tried avoiding brick-and-mortar shopping. If you were a shareholder during this time, you were rewarded tremendously. However, things have taken a downward turn. 

As of May 23, Etsy's stock is down 70% from its peak price set in November 2021. That's a huge decline for shareholders to swallow, and it demonstrates how much some of the best-performing pandemic winners have fallen out of favor. 

But this growth stock might still be worthy of your investment dollars. Let's consider the bear and bull arguments to create a thoughtful perspective about the business. 

The bearish case for Etsy 

In the summer of 2021, Etsy made $1.6 billion and $217 million acquisitions of Depop and Elo7, respectively, to round out its offerings and create what CEO Josh Silverman calls a "House of Brands." Sounds like a good strategy, right?

But most of 2020 and 2021 was generally a rosy time for the stock market, and because of this, company valuations were probably stretched quite a bit. Realizing that it had overpaid for these two acquisitions, the management team was forced to write down the value of those assets to $1 billion in 2022.  

While this wasn't a cash expense, it shows that Etsy executives essentially wasted that much capital that could've gone toward other uses. Because of this poor decision-making, investors might want to be extra critical of management's actions going forward. 

As I mentioned, Etsy soared during the worst days of the pandemic. But a new economic reality is proving to be a headwind for the business. Etsy's various marketplaces lean more toward discretionary purchases, things people can delay purchasing when inflation is high and their spending ability is under pressure. In the first quarter of 2023, Etsy's gross merchandise sales were down 4.6% year over year, a sign of activity on the platform cooling down significantly. 

Another thing to keep in mind with Etsy is that while it sells a lot of differentiated products that might be difficult for buyers to find elsewhere, the challenge is to get these customers to become repeat buyers over time. In my own experience, I've purchased something from Etsy two times in the past 16 months. Getting people who are already familiar with Etsy to come back to the site frequently will be harder as consumer behavior is normalizing. 

The bullish case for Etsy 

At its core, Etsy is a marketplace business that connects buyers and sellers. This is a superior business once it reaches a certain level of scale because it can be virtually impossible for a rival service to compete. Etsy's 95.5 million active buyers and 7.9 million active sellers (as of March 31) come to the site because they see the value it provides. If I wanted to start my own marketplace from scratch, I'd not only have to convince sellers to come to the site, when there are no buyers; I'd have to find buyers to shop there, when there are no sellers. This is called network effects, and they're a powerful competitive advantage. 

Compared to a traditional retailer, whether online or brick-and-mortar, one of the key traits to know about Etsy's business is that it doesn't own any inventory itself. The largest asset on a typical retailer's balance sheet might be its inventory balance, which is the merchandise it has on hand that's ready to sell to customers. Etsy doesn't operate this way, and it frees up company cash that would otherwise be tied up. Consequently, the business has proven to be a consistent producer of free cash flow. 

Another reason why investors might be bullish on Etsy is its current valuation. The stock currently trades at a price-to-earnings (P/E) ratio of 36. That's about half the average P/E valuation of 69 over the past five years. What's more, while some tech stocks have bounced back nicely in 2023, Etsy shares are down 25% this year, so there's still a ton of pessimism surrounding the company right now. This means the upside is higher if the business produces solid fundamentals in the years ahead.  

The bearish case certainly holds merit, but I think the bullish arguments are more compelling. That's why Etsy could make for a good investment opportunity if investors feel the same way.