Businesses can equally create value or destroy value for their shareholders. And handcrafted retail company Etsy (ETSY -3.05%) has done a bit of both lately. Perhaps this is why the stock isn't beating the market over the last five years -- it's merely keeping pace with the S&P 500.

I wouldn't hit the sell button just yet on your Etsy shares. I'll explain the struggles. But the situation isn't as dire as the stock price might lead you to believe.

What's going on with Etsy?

In the second quarter of 2023, Etsy posted revenue growth of just 7.5%, which was one of its slowest growth rates ever. That said, the company is still growing its top line and has yet to report a year-over-year drop in quarterly revenue as a public company. Etsy had its initial public offering (IPO) in 2015.

Etsy's ongoing growth is impressive considering its business was growing at a triple-digit pace in the early days of the COVID-19 pandemic. Therefore, not only did it hold on to those pandemic-fueled gains, but it's also continued to add new growth, albeit at a much slower pace.

Etsy was a profitable company prior to its massive growth in recent years but its profitability soared as business boomed. However, the management team became overzealous because of its success.

Looking to expand its market opportunity, Etsy acquired niche marketplace businesses Reverb, Depop, and Brazilian rival Elo7. These moves cost roughly $2.1 billion collectively and accelerated stock-based compensation expenses. 

Acquisitions are a big reason why Etsy has gone from being debt-free to having nearly $2.3 billion in long-term debt. And the share count has also gone up, modestly diluting shareholders.

ETSY Total Long Term Debt (Quarterly) Chart

ETSY Total Long Term Debt (Quarterly) data by YCharts

These acquisitions came at great cost to Etsy and they don't appear to have been worth it. The company recently dumped Elo7, selling it for an undisclosed amount. And because it didn't disclose the amount, it probably means that management didn't get much.

Etsy's management is happier with its acquisition of Depop -- this is the big one with a $1.6 billion price tag. The business is living up to its expectations. But at the Oppenheimer 26th annual Technology, Internet & Communications Conference, management admitted that it didn't get a good price when buying the business. In other words, it overpaid.

To summarize, Etsy has grown marvelously and earned nice profits in recent years, creating shareholder value. But much of these gains were offset by less-than-ideal acquisitions. And hence, here we are with a stock that's merely an average performer.

Where can Etsy go from here?

It's easy to make a case for at least holding shares of Etsy today. As mentioned, revenue is at an all-time high. And user engagement is also quite strong. With more than 96 million active buyers, Etsy has rarely had more consumer demand. And its seller community has never been stronger with 8.3 million active there.

Moreover, Etsy is still profitable even if its growth is slowing. In Q2, it had a 10% net profit margin, which is really strong. 

And finally, Etsy stock has never had a cheaper valuation. This reflects the market's frustration with the company. But from a free-cash-flow perspective, Etsy trades at a very reasonable 15 times trailing results.

ETSY Price to Free Cash Flow Chart

ETSY Price to Free Cash Flow data by YCharts

Ongoing growth, strong profits, and a cheap valuation might all be reasons investors continue to hold shares of Etsy. But the aforementioned 8.3 million sellers may actually be good reason to go one step further and buy shares today.

With that many sellers, Etsy's breadth of products is incredible. As of Q2, the platform had over 115 million listings. In other words, there's plenty of stuff here and its list of available items is growing.

Etsy's management has focused on improving its search results. It wants to make sure it's guiding people to precisely what they're looking for. And the company is also working with its sellers to improve listing quality, as high-quality listings convert browsers into buyers about twice as often as lower-quality listings.

During the pandemic, millions of people tried Etsy for the first time. And people who try Etsy tend to stick around, as evidenced by the company's revenue and engagement remaining near all-time highs even now.

If the company can simply get more people to try Etsy, then it has plenty of products available. And if it can improve its search, then it might be able to convert more people into buyers.

This points to more long-term upside opportunity for Etsy and its shareholders. And considering the stock is cheaper than ever, now is an opportune time to optimistically purchase shares.