Etsy (ETSY -2.17%) stock has been a poor performer in 2023, down by more than 30% through late May. The online marketplace operator had an even worse run since markets began falling in late 2021. Etsy's near-term growth prospects have darkened considerably since that time as consumers tilted their spending back toward more normal patterns.

But Wall Street has overreacted to the company's short-term challenges, and that has created a potentially excellent buying opportunity for patient investors.

Back to growth

It's true that Etsy's revenue trends don't look impressive at first glance. Sales volumes on the platform fell 3% in the first quarter, which is hardly an impressive statistic for a growth stock.

But those results are heavily skewed by pandemic-related demand shifts. Zoom out and the picture is much brighter. Esty's Q1 volumes were up over 200% compared to the pre-pandemic period four years earlier.

Its buyer pool began growing again in early 2023, as well, in contrast with peers like eBay (EBAY -0.14%). And buyers are more likely to continue shopping on the platform than they've been in over a year. "We are pleased to see positive trends in our first quarter 2023 buyer data," CFO Rachel Glaser said in the earnings report published in early May.

Solid finances

Etsy is in a strong financial position, too, even considering the potential for a recession ahead. Free cash flow over the past four reported quarters was more than $600 million, and cash on the books was over $1 billion in late March.

The company's profitability is being supported by recent increases to its seller fees, which helped offset the impact of slowing sales volumes. Adjusted earnings were $170 million last quarter, translating into a 26.6% profit margin compared to 27.5% a year earlier. Etsy is profitable on a net income basis, too, making it less exposed to higher interest rates.

Looking ahead

Bears will argue that Etsy's best days are behind it, and that future growth will be modest in this competitive e-commerce space. That risk is real, given how many choices shoppers have.

Etsy's main challenge -- now that it has consolidated its gains from the pandemic -- is to build more value into the platform for both sellers and buyers. The good news is the company introduced more innovations along those lines in the past few months than it did in the prior full year. These include using AI to make product search results more relevant, and adding more curated shopping lists to the website. Management has plenty of financial resources it can direct toward these growth initiatives, too.

But investors don't have to wait for the results of these shifts to buy Etsy stock at an attractive discount. Its shares are priced at about 4 times annual sales, down from a peak price-to-sales ratio of over 15 earlier during the pandemic. While the timing of Etsy's growth rebound is uncertain, its finances are strong. And investors can now take advantage of the current pessimism built into the stock price while they patiently wait for the selling environment to improve.