Investors aren't thrilled about the short-term growth prospects for Etsy (ETSY 0.34%) stock right now. The e-commerce specialist has been going through a painful growth hangover that has pressured sales and earnings. It is just barely adding buyers to the service, and its net profit margin is shrinking, too.
These challenges add risks for investors considering buying the stock. But there are some good reasons to like Etsy today, too. Let's dive right in.
1. Modest sales trends
Etsy's business is outperforming peers in a tough selling environment. After shedding buyers for four consecutive quarters, the company returned to growth in this key metric in early 2023.
Its pool of active buyers rose 1% compared to a 7% drop for eBay. Yet both companies complained about slowing consumer spending as shoppers looked to save cash and reduce expenditures in non-essential categories.
ETSY Revenue (TTM) data by YCharts
Sales volumes last quarter were down 3% after adjusting for currency exchange rate swings. In essence, the past few quarters have been about holding onto the fantastic growth that Etsy achieved during the pandemic rather than boosting sales significantly.
2. Highly efficient businesses
The middleman selling model used by both Etsy and eBay can deliver incredible returns thanks to its capital-light approach. Cash flow is impressive for this reason, too. Etsy's trailing-12-month free cash flow has been holding above $600 million for several quarters, and the company is sitting on over $1 billion of cash today. These wins mean management is free to spend aggressively on growth initiatives and to deliver increasing cash returns to shareholders through dividends and stock buybacks.
Etsy has even more potential here thanks to its focus on selling unique products and catering to smaller businesses. The company can charge higher fees, for example, and its take rate sits at over 20% of sales compared to around 12% for eBay. Ideally, this difference will mean higher overall profit margins once the business achieves greater scale.
3. Mixed outlook
Investors won't see the official Q2 update until late July, but expectations are modest for that report. Revenue is on track to rise by 6%, according to most Wall Street pros, landing at about $620 million. Etsy's management team is forecasting an adjusted profit margin of 26% of sales, down slightly from the past quarter's 27%.
Given those modest trends, the stock still seems pricey following its decline in 2023. Shares are trading for nearly 5 times annual sales, or about double eBay's valuation. Etsy can earn that valuation and even expand it if the company can post accelerating gains in its buyer pool. Improvements to the shopping experience should help in that regard, and so will the eventual rebound in the industry.
But most investors will likely want to simply watch this e-commerce platform stock for now to see if the company can engineer a more substantial rebound. In the meantime, look for more successful growth stocks that are posting solid sales gains in expanding industries.
