If you've given up hope that Etsy (ETSY 0.34%) stock might bounce back anytime soon, that's an understandable decision. It's not just down 70% from its late-2021 peak. Etsy shares have been sliding lower again since February of this year, failing to participate with the rest of the market's general bullishness. It certainly seems like something is wrong.
As the old adage goes, though, expect it when you least expect it. This stock's big pullback in 2022 and persistent weakness in the meantime may be a great buying opportunity for two overarching reasons.
1. The pandemic boost was a tough act to follow
On the off chance you're reading this and aren't aware, Etsy is a most curious e-commerce company. Whereas Amazon aims to sell mass-produced merchandise to millions of consumers who all want the exact same products, Etsy's platform is meant to connect shoppers with sellers of handcrafted goods.
And it's done this pretty well since its launch in 2005. It facilitated the sale of $13.3 billion worth of (mostly) handmade items last year, collecting nearly $2.6 billion worth of revenue for its role in those sales. It's also operationally profitable, which is more than several other e-commerce platforms can say.
ETSY Revenue (Quarterly) data by YCharts
Little of what the company's done since the pandemic-prompted frenzy has been good enough for investors, though. Its critics are likely worried about last year's decline in the number of the site's regular shoppers, or for that matter, the decline in the number of its active sellers. Both factors contributed to tepid sales growth and even led to some modest year-over-year sales declines.
However, there's a trend in play most investors may be overlooking: a growing appreciation for handcrafted goods.
2. Etsy already is where consumers are going to be
The handmade goods market can be a bit tricky to identify, or even define; much of this business may be done in unofficial and unrecorded channels.
But there are some market research outfits willing to do the digging needed to quantify the opportunity. IMARC Group is one of them. It estimates the worldwide handicrafts market will swell from 2022's tally of $752 billion to nearly $1.3 billion by 2028. That's an annualized growth rate of a little over 9%, jibing with forecasts from Business Research Insights, as well as market research company Technavio, which believes the business will grow at an annualized clop of more than 13% through 2025. Not bad.
And those growth outlooks are particularly credible in light of changing societal and cultural norms.
Take environmental concerns as an example. Deloitte notes that 64% of Gen Z consumers would pay more to buy an environmentally sustainable product. The purchase of used clothing or recycled/upcycled items, of course, reduces demand for newly manufactured goods.
Less apparent is the growing appreciation for things that are handmade -- and therefore inherently unique -- instead of items that are mass-produced. Deloitte adds that 1-in-5 U.S. consumers are willing to pay a 20% premium for a personalized product. Millennials in particular are big fans of decor with a personal backstory and handmade clothing that's a personal expression of themselves.
These are just a couple of reasons the analyst community expects Etsy's top-line growth to reaccelerate beginning next year after this year's lull.
Data source: Stockanalysis.com. Chart by author.
However, it's earnings that are really expected to explode after next year's rebound. With annual revenue now nearing $3 billion, Etsy's got enough scale to readily cover its relatively fixed expenses and have a lot more of it left over. This is the critical mass a handful of patient investors have been waiting for, even if most investors have lost their patience or can't look beyond last year's big impairment charge.
Without that charge, by the way, Etsy would have earned on the order of $3.50 per share, which is in line with its recent and projected annual earnings.
At this point, the bigger risk is not being in
A guaranteed winner in the immediate future? Not quite. Although the company's got its finger on the pulse of the next big thing in consumer preferences, the stock's still carrying around plenty of perception baggage. It could be a while before most investors have enough confidence in the stock to allow it to move higher without interruption.
On the other hand, recoveries tend to materialize with little to no advance warning. It's also difficult to argue that most of the worst-case scenario isn't already baked into the stock's price.
From a risk-versus-reward perspective, the bigger risk to interested investors is waiting on the sidelines -- only to see it end up making a long touchdown run.
