One of the most tradeable stocks during the peak of the pandemic was Etsy (ETSY 1.10%), an e-commerce platform best known for its unique handmade goods. As the pandemic gave rise to an increased number of remote-work employees, people found themselves flocking to online platforms such as Etsy or Amazon to find everything to create their own work-from-home oasis.
However, a number of factors have caused Etsy stock to cool down. Revenue growth has slowed compared to pandemic levels. On top of all that, the economy remains in an environment of rising interest rates, causing some investors to shy away from consumer discretionary businesses like Etsy.
Despite these hurdles, I believe the stock presents an interesting buying opportunity. Here's why I am bullish and believe it looks like an attractive buy right now.
NYSE: ETSY
Key Data Points
How is the business performing?
The pandemic served as a major catalyst for Etsy, and in 2020 revenue grew 111% year over year, and net income increased a whopping 264%. The company followed this up with respectable results in 2021, with 35% revenue growth and a 41% increase in profit.
It was unreasonable for investors to believe that Etsy could sustain this level of growth. Its 2022, results illustrated how the tailwinds from the pandemic were coming to a halt -- and since then, investors have punished the stock. Revenue for 2022 was $2.6 billion, a mere 10% year-over-year increase. Moreover, management guided for first-quarter 2023 revenue in the range of $600 million to $640 million, which would represent roughly 10% annual growth at the high end of guidance.
Since the company issued full-year 2022 results back in February, the stock has cratered almost 40%. And since its first-quarter 2023 results issued in early May, Etsy stock is basically flat.
Revenue for the quarter ended March 31 was $641 million, narrowly beating the high end of its prior guidance. However, net income decreased 13% year over year, largely because of material increases in operating expenses. The company grew its product development and marketing costs by 30% and 11% year over year, respectively.
Given these cost increases, it's natural that some investors might become spooked, especially because it seems like just about every big tech company is slashing expenses left and right. But I believe that Etsy is allocating costs strategically and that some of the investments it's making will yield noticeable results sooner rather than later.
Image source: Getty Images.
Are there any catalysts?
Given the rise in product development expenses in particular, investors should be curious about what new features Etsy has up its sleeve. For starters, the company recently launched a new way to search for goods. For years, the only way to find something on Etsy was to type it into a standard search bar. Now, the company has rolled out a feature called "search by image."
Users of the mobile app can take pictures of unique items they might see while out shopping. Etsy will then take the image and use visual search algorithms to identify similar-looking items on its marketplace. This opens up an entirely new avenue for shoppers to discover items on Etsy's platform.
Perhaps even more exciting is Etsy's recent foray into artificial intelligence (AI). On the surface, an e-commerce platform might not be the first use you think of for AI. But back in May, Amazon CEO Andy Jassy explained that AI has been powering the company's platform for decades, in the form of product recommendations.
Etsy seems to be taking the baton from Amazon and running with it. The first-quarter 2023 investor presentation illustrated how the company plans to leverage generative AI. More specifically, users will be able to ask a chatbot a question and be fed items on the marketplace to parse through based on that question.
The valuation is telling
As of the time of this writing, Etsy's market capitalization sat at $11.6 billion and the stock traded at 4.5 times its trailing-12-months sales. Given its unique model among e-commerce marketplaces, as well as its conduit for visual search, some comparable companies could include Amazon, Shopify, and Pinterest.
Currently, Amazon, Shopify, and Pinterest trade for price-to-sales (P/S) ratios of 2.5, 13.6, and 6.8, respectively. While Amazon trades at the lowest P/S among this cohort, it's important to remember that the company is much further along in its maturity, and has a number of other business segments beyond e-commerce. Bearing that in mind, investors can see that Etsy trades at a steep discount compared to some of its peers.
The biggest risk factor I see for Etsy is a slowdown in consumer spending. For example, there is a thesis that with the student loan payments resuming, consumer spending might slow down, which would affect companies such as Etsy. While this concern is valid, it is near-term thinking.
Despite beating its top-line guidance in the first quarter, Etsy stock trades narrowly above its 52-week low. The consensus price-target estimate on Wall Street is $126 per share, which implies 37% upside from current levels.
Long-term investors should be encouraged by the company's progress in new, innovative features that could spur future growth. A prudent investment strategy would be to dollar-cost average over time into the stock. Going into second-quarter earnings, Etsy seems attractive and could be worth a look for your portfolio.
