What happened
Shares of Etsy (ETSY -1.43%) fell 29.4% in the first half of 2023, according to data from S&P Global Market Intelligence. Investors in the handmade and vintage goods e-commerce specialist also missed out on a robust market rally, as the S&P 500 index soared 15.9% higher over the same period.
The company has been vulnerable to macroeconomic pressure, and Etsy fell short of Wall Street's earnings estimates in the quarterly reports published in February and May.
So what
Etsy's shareholders have figured out that the company's business tends to suffer when American consumers experience challenges to their personal budgets. So the stock has been following the ups and downs of inflation updates and other economic reports in recent months.
However, it could take a while before the slowing revenue growth snaps back to normal, lagging behind the improving economic indicators by several months or maybe even a couple of quarters. The handmade, vintage, and otherwise unusual items you buy through the Etsy marketplace aren't always at the top of the list for planned purchases after a long period of belt-tightening budgets.
Now what
So Etsy's plunging stock chart makes sense, given the current state of the economy. However, the company's long-term business prospects still look great for several reasons.
- The stock trades at 28 times forward earnings estimates and 16 times free cash flow. These valuation ratios look quite affordable next to Etsy's muscular long-term growth.
- On that note, top-line sales have grown at a compound average growth rate (CAGR) of 42% in the last five years, a period that includes the low-single-digit slowdown of 2022.
- E-commerce may have felt like a pandemic trend a couple of years ago, but it should be clear by now that online shopping is here to stay. Etsy has carved out a very specific niche in that healthy sector, potentially setting the company up for decades of robust growth once the world economy gets back on its feet.
I could go on pointing out long-term growth boosters such as international expansion, artificial intelligence-powered item search, enhanced sales and marketing plans, and the company's ability to broaden its business portfolio into new products and services. This company has a lot going for it.
Sure, Etsy may have been overdue for a price correction when the inflation panic started in November 2021, but the bears took it too far. At this affordable stock price, Etsy looks like a solid investment over the next few years.