After closing at an all-time high price of $297 in 2021, Etsy's (ETSY -1.41%) stock price has gone nowhere but down in the following two years. It is currently trading at only $85.

While the bears have concerns about the e-commerce site's ability to navigate a weak economic environment, contrarian investors are sniffing around for potential bargains after the significant fall in Etsy's share price.

So is now the right time to buy Etsy's stock?

Bear and bull figurines on a metal platfirm.

Image source: Getty Images.

Another unexciting quarter for Etsy

After delivering phenomenal performance when the COVID-19 pandemic hit, with revenue up 111% in 2020 and another 35% in 2021, Etsy is facing some challenging times in growing its business lately.

The e-commerce site, which specializes in vintage and handmade items, reported a 1% decline in gross merchandise sales (GMS) in 2022, a marked turnaround from the growth it clocked in the earlier two years -- 107% in 2020  and 31% in 2021. The trend continued in the first quarter of 2023, with GMS declining by 5% year over year to $3.1 billion. Clearly, the weak economic environment has impacted the company's performance.

On a slightly positive note, Etsy grew active buyers by 1% during the quarter, which was the first time that metric had improved since the fourth quarter of 2021. This improvement signaled that user engagement remains high even though users were spending less money, on average. What's more, revenue rose 11% to $641 million due to increased transaction fees.

Still, investors should not get overly excited by the growth in revenue since it came from high seller fees and not from an increase in sales on the platform. Increasing seller fees during a downturn could be a bad move since it might erode Etsy's goodwill among the sellers.

Long story short, it will likely take a while before Etsy regains its growth momentum.

Reasons to be optimistic in the long run

The near term doesn't look particularly rosy for the e-commerce company. Still, investors can be hopeful that its longer-term prospects remain bright.

To begin with, Etsy operates in a vast market with an estimated total addressable market (TAM) of nearly half a trillion dollars. With an annual GMS of less than $12 billion, the tech company has just touched the tip of the iceberg. It still can grow its user base (both domestically and overseas) and increase average user spending to capitalize on the vast opportunity.

To this end, Etsy's unique value proposition of offering one-of-a-kind items will remain relevant to customers for the years to come. On Etsy, customers can access personalized and unique products they usually cannot get on other mass-market platforms like Amazon. On the other hand, sellers get to monetize their specialized talents and skills on Etsy -- a win-win for both parties.

Besides, Etsy is not shy about expanding beyond its comfort zone by acquiring other up-and-coming platforms, as it did with Elo7 and Depop. With $1.1 billion in cash, cash equivalents, and other investments, it has the necessary firepower to act when the opportunity presents itself. In short, it will likely take years before Etsy exhausts its growth opportunities.

Is Etsy's valuation attractive?

Another critical factor to consider before buying Etsy's stock is its valuation. You want to avoid overpaying for a stock in order to have a margin of safety and higher upside potential.

As Etsy's stock price has fallen significantly, its current valuation is on the lower end of its five-year average. For perspective, its current price-to-sales ratio is 4.4 while its five-year average is 10.6. Still, its valuation is much higher than Amazon's multiple of 2.4.

So while Etsy's stock valuation is lower than its historical metric, you can hardly call it a bargain. At least, it's not cheap if you compare it to its more established peer Amazon.

So is it a buy?

Etsy is facing some near-term challenges that could persist for a while. Still, investors should not ignore its longer-term growth opportunities as Etsy strives to capture a larger market share.

On the other hand, while Etsy's stock valuation is not overly pricey, it is in no way at bargain levels. At least, I'm not excited.

On balance, bullish investors could consider initiating a small position in the company and adding to that position over time -- either when the stock becomes cheaper or after the company executes its plan.