After suffering the brunt of last year's bear market, growth stocks have been rebounding since the beginning of 2023. But not all growth stocks are joining the party. E-commerce specialist Etsy (ETSY -2.17%) is one of the laggards, with its share price down 25% since the year started.
The tech company is undoubtedly facing some issues that are hard to ignore. Still, opportunistic investors won't want to miss this chance. Etsy stock is worth buying, especially at current levels. Here's why.
Why Etsy is struggling
Let's first consider why Etsy's stock is dropping, even as much of the market is moving in the opposite direction. The culprit is likely the company's financial results.
In the first quarter, Etsy's revenue increased by 10.6% year over year to $640.9 million. That's a much slower revenue-growth rate than the company's historical pattern -- but at least the top line is moving in the right direction.
The company's net income decreased to $74.5 million, down 13.4% year over year. Still, given the challenging economic situation over the past year, it's not surprising to see Etsy's bottom-line decline. After all, the same thing has happened to many other e-commerce specialists. But on closer inspection, there's a problem with Etsy's revenue growth.
ETSY Revenue (Quarterly YoY Growth) data by YCharts.
Last year, the company increased its seller transaction fee from 5% to 6.5%. The change took effect on April 11, 2022. Given that the company's gross merchandise sales dropped in the most recent quarter, the top line would have declined if not for the increased transaction fee the company imposed on sellers starting the second quarter of last year.
We can expect Etsy's revenue to move in the opposite direction, at least for a while, especially since we could enter a recession later this year, as the U.S. Federal Reserve predicts. The company's platform focuses on vintage and handmade goods, which aren't known for being cheap.
Consumers will likely reduce spending on the kinds of goods on Etsy's platform in case of an economic downturn. As a result of these factors, investors are selling off the company's stock.
A massive market and Etsy's moat
Many companies are facing similar issues. Some of them will rebound, while others might not. Etsy is squarely in the former category, in my view. Let's consider three reasons why.
First, the e-commerce market has been -- and continues to be -- on an upward trend. E-commerce opens a world of opportunities to sellers and buyers that would have otherwise been untenable. For example, I recently bought an item on Etsy from Mali in West Africa. It was delivered to me in the U.S. in three weeks for under $100 (shipping included).
Imagine getting said item without e-commerce unless one just happened to be visiting Mali or somehow came across the seller's own website if they had one. That's what makes Etsy so powerful. Buyers can connect with a much broader library of sellers and vice-versa, and it's why Etsy's reach should continue to grow.
Second, Etsy's specific niche of e-commerce -- handcrafted or vintage items -- is underpenetrated. The company estimates a total addressable market of $2 trillion, of which it has grabbed just a minuscule fraction. So there's plenty of whitespace remaining within Etsy's specialty.
Third, the company has built a competitive edge, namely the flywheel effect. The more buyers on its platform, the more it becomes attractive to sellers looking specifically for vintage and handmade goods so that the value of its website increases as more people use it.
It's best to stay the course
Etsy's revenue soared in the early days of the pandemic. Now, the top-line growth rate has slowed, which will almost certainly continue, at least through the end of the year.
But eventually, Etsy's revenue and earnings growth should rebound once economic conditions improve, especially given the vast opportunities ahead. Even as the stock remains southbound for now, investors should strongly consider adding shares of Etsy to their portfolios before the company bounces back.
