Although Etsy (ETSY 0.34%) has produced a respectable return of 111% over the past five years, its shares are down an eye-watering 69% from their Nov. 2021 all-time high. This business boomed during the depths of the pandemic, only to hit a rough patch in 2022 that caused a noticeable slowdown for the online marketplace. 

Shares are currently trading at a price-to-earnings ratio of 36, about half the trailing-five-year average, which is certainly compelling for Etsy bulls. But before buying the business, here are three things the smartest investors know about this top e-commerce stock. 

Etsy operates a capital-light business model 

This company is not like a traditional retailer because Etsy doesn't own any inventory itself. And this has some positive effects throughout the business. 

Look at any major retailer's balance sheet, and you'll quickly notice inventory is one of the biggest categories of assets. These companies have to acquire or produce the products that they then turn around and sell to customers. This ties up a lot of cash.

Etsy has none of these worries as its business model is to provide the marketplace where buyers and sellers come to transact in a digital environment. And this is the key reason why it has such a wonderful financial profile. Etsy's operating margin in 2021 was 20%. Just five years earlier in 2016, it was 4.8%. That's a clear demonstration of a highly scalable and capital-light enterprise hitting its stride. 

Moreover, Etsy doesn't have any physical stores, so in any given period, the bulk of its expenses go to marketing. And unsurprisingly, capital expenditures are low, amounting to a little over 1% of revenue in 2022. 

It's made some expensive acquisitions 

CEO Josh Silverman has previously said he wants the company to become a "house of brands" where consumers can find any special, handcrafted, or vintage item they can dream of. In 2021, to make this vision happen, Etsy purchased Depop, a secondhand fashion site, and Elo7, a Brazilian version of Etsy, for a total sum of $1.8 billion.

Two years ago, when the business was firing on all cylinders thanks to the surge in online shopping, many internet companies, especially e-commerce-related ones, were overvalued. But Etsy's management team thought it was the right strategic move to acquire Depop and Elo7 to make progress in the "house of brands" plan.  

Last year, recognizing the value of those additions had fallen short of expectations, Etsy took an impairment charge related to Depop and Elo7 of about $1 billion in the third quarter, which is why the company was unprofitable on a GAAP basis last year.

It has a huge expansion opportunity 

In 2022, Etsy processed $13.3 billion in gross merchandise volume (GMV), the total dollar value of all the transactions that take place on its marketplaces. This figure is up 166% from 2019's pre-pandemic GMV of $5.0 billion. It's obviously a good sign that Etsy hasn't given up any gains in the last couple of years. 

But the company has its sights set on a huge global opportunity, valued at $466 billion in GMV. This is what management estimates Etsy's total addressable market (TAM) to be when looking at its seven core countries (U.S., Canada, U.K., France, Germany, Australia, India), as well as its relevant product categories. This means that Etsy has a tiny market share today as 2022 GMV amounted to roughly 3% of its forecast opportunity.

Investors should always take a management team's TAM projections with a grain of salt, but I do have confidence that Etsy will keep growing over the long term. It currently counts 95.5 million active buyers on its platform, up significantly from pre-pandemic levels. And over the last 12 months, Etsy's active sellers increased 3.8% to 7.9 million. This happened after the marketplace instituted 30% higher transaction fees in April 2022, showing just how valuable these sellers believe Etsy is for their businesses.