Investors have come to different conclusions about Etsy (ETSY 0.34%) and eBay (EBAY 1.32%) stocks in 2023. eBay, the more mature online marketplace business, is trading in positive territory this year, while its smaller peer is down by nearly 40% through late August.
Both companies are underperforming the S&P 500 in 2023, in part, because of stresses on the e-commerce industry following soaring growth during the pandemic. Yet these challenges are likely temporary, which means investors could benefit from picking up shares of these businesses while Wall Street is in a sour mood.
But which one is the better fit for your portfolio? Let's take a closer look.
Comparing revenue to buyer growth
Etsy is faring slightly better when it comes to overall growth today. The company last reported an 8% year-over-year sales uptick for the Q2 selling period that ran through late June. Compare that to eBay's 5% year-over-year boost.
Both companies are getting growth from sources other than their main marketplace platforms, as eBay's sales volumes were down 1% year over year last quarter and Etsy's were flat. In eBay's case, that decline was offset by its expanding advertising business. Etsy, meanwhile, grew thanks to its increasing pool of buyers plus the lift provided by higher seller fees.
Most Wall Street pros project that Etsy will extend that slightly faster momentum through 2023, with sales likely to rise 7% this year compared to eBay's expected 4% gain.
Financial wins go to eBay
eBay stands out as the stronger stock when it comes to its finances. Thanks to its larger global scale and its prime position in niches like collectibles, sneakers, and jewelry, the company generates a profit margin in excess of 20%. Etsy's comparable figure is just 14% for its more unique collection of merchandise.
ETSY Operating Margin (TTM) data by YCharts
eBay is also a master of generating cash. Operating cash flow last quarter was $605 million, or a blistering 24% of sales. The company directs much of its excess cash back toward shareholders through stock buybacks and a dividend that currently yields 2.3%. Etsy is more focused on its growth investments today, and so investors can expect fewer cash returns from the business.
eBay is the better buy in this case
Etsy's valuation has dropped significantly this year, but investors might still consider the stock expensive. Shares trade for 3.7 times annual sales compared to eBay's price-to-sales ratio of 2.4.
That higher valuation makes sense if you believe Etsy can expand faster than its larger peer for many years. Management thinks accelerated gains are possible through improvements to the shopping, selling, and buying experiences, but investors will have to wait for concrete evidence of success in these initiatives.
In the meantime, eBay boasts higher profitability and a more stable sales base, plus the bonus of a generous dividend payment. These factors make the stock a more compelling choice for most investors. Sure, eBay likely won't grow sales at the type of rates that Etsy is targeting over the next few years. But it's a highly efficient, cash-rich business that has a good shot at generating market-beating returns for investors from here.
