Although shares of Etsy (ETSY 0.34%) are up 109% over the last five years, they are currently 70% below their November 2021 peak price. Following a pandemic-driven explosion in demand for the online marketplace, last year was a bit of a normalization period that saw gross merchandise volume (GMV) and sales numbers decelerate. 

Many investors are also certainly worried that a potential economic slowdown will negatively impact Etsy's business. While this fear is definitely a real issue to consider, I believe it feeds into an even bigger risk for this top e-commerce stock. Let's take a closer look at what investors should know. 

Etsy's bull case is compelling 

There are a few important reasons why Etsy is an attractive company to own. For starters, it doesn't carry any inventory on its balance sheet because it's just an online marketplace that connects buyers and sellers, collecting fees from the transactions that happen. This capital-light model has resulted in improved profitability over time (except in 2022 due to a one-time impairment charge) and a lot of free cash flow. 

Second, Etsy appears to have a huge expansionary runway ahead of it. In 2022, the company's GMV totaled $13.3 billion. That's a tiny sliver of what management estimates is a huge $466 billion total market opportunity. As the business continues to grow in its core geographies, revenue and profits should be set to rise. 

Another one of Etsy's favorable traits is just how unique its platform is. According to a company survey, 87% of buyers agreed that Etsy's marketplace offers merchandise that they can't find at other retailers. It's no wonder the business currently has 95.5 million active buyers, double the 47.7 million just three years prior. 

Etsy has a significant risk factor 

On the surface, this is a solid business that has strong financials and that really provides value to its user base. But investors should pay attention to a lingering risk. 

Etsy prides itself on specializing in unique, vintage, and handcrafted items. This focus works well when consumers are looking for goods to buy for special occasions or as gifts for others. It also works when there's a global pandemic, and everyone is looking for face masks. 

Additionally, Etsy's top two product categories are home and living and jewelry and accessories. These are generally bigger-ticket items that likely aren't bought frequently. In other words, Etsy's platform doesn't lend itself to repeat purchase behavior. Instead, a valid argument can be made that the company focuses on one-off, discretionary items. In fact, roughly half of all active buyers only shop on Etsy once a year. 

From my own experience, I've shopped on Etsy probably three times in the last seven years. And this was because I couldn't find what I was looking for at other shopping destinations. So Etsy was a last choice instead of where I started my shopping journey. I'm sure I can't be the only one who has this perspective. 

This situation is a near-term risk because of the state of the global economy. We've already seen Etsy's business slow down dramatically starting last year. If a severe recession were to happen, consumers would certainly be even more cautious about how they spend their money. They'd prioritize essential purchases, as opposed to the things that Etsy offers. 

And over the long term, this is also a meaningful risk because it is harder to attract repeat buyers. It's typically more expensive from a marketing perspective to find new customers than to reengage previous ones. To its credit, Etsy has been investing in new capabilities, like improvements to search functionality and social media engagement, that can drive greater purchase intent. And this could end up paying off in the future. 

But for now, shareholders should keep a very close eye on the company's ability to get its buyers to come back more often.