What happened

Shares of Etsy (ETSY 0.34%) stock dropped 12% in September according to data provided by S&P Global Market Intelligence. It reported disappointing second-quarter earnings results in August, and investor pessimism continued into September.

So what

Etsy was an early pandemic darling, gaining millions of new customers for its handcrafted and vintage products. Sales soared for custom masks and other items, but it has not been able to keep up high growth. Even a few years out, it's still struggling to return to growth.

Revenue increased a respectable 7.5% in the 2023 second quarter, but that was entirely due to fee hikes. Gross merchandise sales (GMS) were down less than 1%. Net income was $62 million, down $11 million from last year, although that included an impairment charge for the sale of Elo7, a business it had acquired two years ago.

Some positives were that active buyers increased almost 3% to 91 million. That included 6 million new buyers as well as a high rate of reactivated buyers, and active buyer retention rates were strong as well. However, management is guiding for GMS of about $3 billion and revenue of about $625 million in the third quarter, representing flat GMS sales growth and about 5% growth in consolidated net revenue.

Now what

Etsy impressed investors early on due to its niche marketplace that competes with Amazon and robust profitability. These features remain intact, and Etsy should have continued prospects as it leans into its differentiated marketplace and launches improved services and new features. However, it's taking longer than investors anticipated to return to growth following its extraordinary pandemic performance.

Once it does get back to its baseline, it's well positioned to jump-start growth again. It's still profitable, and sales are increasing, which is an excellent starting point. It has enough brand power to raise fees when necessary without losing sellers -- active sellers increased 12% in the second quarter.

Etsy stock is down a whopping 47% this year even as the S&P 500 is up 12%. At this price, it trades at the dirt cheap valuation of only 13 times forward one-year earnings. Does this present a buying opportunity or a value trap?

In the near term, Etsy stock may not recover so quickly. But long-term, it should get back to creating shareholder value, so investors should keep it on their watch lists.