Etsy (ETSY 0.34%) shoppers are used to hunting for good deals, but this time it might be investors who get the killer discount. The marketplace platform's stock trades down more than 40% so far in 2023 even as the Nasdaq Composite index rose 26% over the same timeframe.
There are some good reasons for the performance gap, of course. Etsy hasn't exactly wowed Wall Street in its past few earnings reports. Sales volumes are sluggish, and profitability is falling as consumers scale back on e-commerce shopping.
Pessimism can be an investor's best friend, though, as it generates attractive valuations for what are potentially short-term reasons. But is that what's happening with Etsy right now?
Etsy is seeing mixed growth trends
Etsy is still stuck in sluggish growth mode. After peaking at 120% year-over-year gains during the pandemic, its quarterly expansion rate fell to the high single digits today. Last quarter's 8% year-over-year uptick reflected flat sales volumes and a 6% decline in average spending per buyer. These metrics don't inspire a lot of confidence for growth-focused investors.
Yet there are encouraging signs of gathering momentum. Etsy gained enough buyers last quarter to push that key metric to a new record. And its pool of highly active shoppers held steady last quarter, implying stabilization after nearly a year of declines. Overall, most investors expect sales trends to accelerate slightly over the next few quarters, with revenue rising about 7% this year and 9% in 2024.
Cash and margins
The other big drag on Etsy's stock is profitability. Net profit margin declined by 3 percentage points in the first half of 2023, falling to 11% of sales from 14% of sales a year earlier. That's no surprise given the slowing sales trends, combined with rising expenses. Yet the picture is brighter on cash flow, which improved this year and is in solidly positive territory.
ETSY Operating Margin (TTM) data by YCharts
Etsy also sits on over $1 billion of cash today, further reducing the risk that the company might have to take on new debt to fund its business during a sharper sales downturn. That's a relief for investors who might be worried that rising interest rates will further pressure its modest profit margins. Most Wall Street pros expect Etsy to remain profitable for the full 2023 year.
Price and value
As you might expect, Etsy's stock valuation declined as its short-term operating outlook worsened. You can now buy shares for just 3.2 times annual sales, down from nearly 8 times sales in early 2023. There could be room for this valuation to decline even more if growth doesn't start rebounding, too. eBay is valued at 2.2 times sales, after all.
As a result, most investors want to simply watch Etsy stock for now. It's encouraging to see the buyer pool expanding today, and the company is not facing any type of cash crunch.
Yet it still might be several quarters before its business returns to the type of sales trends that growth investors like to see. In the meantime, keep an eye on sales volumes and on Etsy's pool of highly repeat buyers. Rebounds in these metrics might be the first indication that the business is finally back in growth mode.
