The coronavirus pandemic gave a boost to Etsy (ETSY 0.34%), as the online marketplace for unique and handcrafted goods experienced rapid growth. But in the past several quarters, it's been clear just how dramatic the company's slowdown has been, due mainly to difficult comparisons and a normalization of consumer behavior.
Nonetheless, the e-commerce business has done a wonderful job at outshining the dominant player in the industry, Amazon (AMZN 3.43%), in one key area. Let's take a closer look at what that is, and whether Etsy deserves a spot in your portfolio right now.
Targeting a specific corner of the market
As I noted above, Etsy prides itself on selling special goods. A survey conducted by the company revealed that 87% of Etsy buyers agreed that the site sold items they couldn't find anywhere else. This is exactly how it differentiates itself from Amazon.
The tech behemoth has spearheaded the secular growth of online shopping -- Amazon now commands nearly 40% of all dollars spent on e-commerce sites in the U.S. -- by prioritizing a huge selection of items, convenience, low prices, and free and fast delivery. Whereas Amazon is viewed more as having mass-market appeal, Etsy targets a specific corner of the market: customers searching for distinctive, quirky, and eccentric merchandise.
People are willing to wait for the goods that Etsy sells, as they might skew more toward discretionary items for one-off special occasions as opposed to what Amazon offers. Therefore, Etsy doesn't have to compete with the speed and convenience that Amazon is so well-known for. And even if Etsy wanted to battle in this area, it would almost certainly lead to an undesirable outcome. Good luck to any business that wants to compete with the massive logistics footprint Amazon operates with, or its successful Prime membership program.
But the takeaway here is that even smaller, niche-focused businesses can take on dominant enterprises. Etsy's numbers back up this claim. The base of active accounts is still rising, with buyers and sellers increasing in numbers on a year-over-year basis in the second quarter.
While growth has slowed this year and last, revenue in the latest quarter (Q2 2023, ended June 30) of $629 million was 247% greater than four years ago in Q2 2019, before the pandemic. During this same period, Amazon's total revenue (for online stores and third-party seller services) increased 98%, showing just how impressive Etsy's gains are.
Moreover, Etsy's strategy of selling unique merchandise doesn't mean its growth prospects are limited. Management believes the business's total addressable market, from the perspective of gross merchandise sales (GMS), is estimated to be $466 billion, significantly greater than the company's 2022 GMS of $13 billion.
Is it time to buy Etsy?
In the last five years, Etsy shares have climbed just 31%, but that's a better gain than Amazon stock's 27%. It's been a completely different story this year, though. Etsy's stock price has cratered 48%, while Amazon is up a whopping 49%.
Investors might be looking at Etsy as a potential buying opportunity right now, in the hope of taking advantage of the market's pessimism. With a forward price-to-earnings ratio of just 13.4, it's easy to see how far Etsy has fallen. That's the cheapest valuation Etsy has had since at least the start of 2021.
The unique value proposition I discussed previously demonstrates that Etsy is playing a completely different game than what Amazon is known for. And there's no reason to think that this competitive dynamic is going to change anytime soon. This makes Etsy worthy of investment consideration.
