If you're searching for growth at a reasonable price, Etsy (ETSY 0.34%) has likely landed on a few of your stock screens in recent months. The former Wall Street darling has been crushed lately, falling nearly 50% so far in 2023 even as most of its e-commerce peers have rallied. Etsy stock has become much cheaper, as a result, when compared to companies like eBay, Shopify, and Wayfair. Is this e-commerce stock now a bargain or a value trap?
Potential investors should do their best to approach any Etsy stock purchase with a clear understanding of the company's main challenges. Stocks don't typically decline by over 40% for no reason, after all. With that understanding in mind, let's look at a key factor pressuring the business, along with 1 reason to be optimistic about its earnings prospects.
An Etsy red flag: Market share struggles
Etsy made progress in consolidating most of the gains that it achieved during the booming growth days of the pandemic. Yet its sales trends still look weak compared to some e-commerce specialists. Sales volumes were flat on its platform last quarter, about even with eBay's performance, while Shopify reported an 18% year-over-year volume spike. Amazon reported accelerating growth in its product sales as well.
Look a bit closer and you'll see other signs of demand weakness. Etsy isn't finding it as easy to attract new buyers to its platform. Instead, it focused its attention on keeping its current base and on re-engaging buyers who recently become inactive.
Overall, these initiatives helped the buyer pool rise by 3% last quarter to a record 91 million. Yet average spending per shopper continues to decline. The stock likely won't see a big rebound until Etsy can end this slump and return to faster volume and buyer growth.
An Etsy green flag: The take rate
Marketplace businesses depend on merchant fees to fund most of their profits, and these fees are also worth watching because they are excellent clues to seller satisfaction. Merchants won't pay more for access to the services on the platform, after all, unless they are getting plenty of value from them.
Etsy seems to be delivering that extra value. The company's "take rate," or the percentage of the sales price that's charged in fees, rose to 21% of sales last quarter from 19% a year earlier. Some of that improvement can be tied to a recent hike in the fees, which isn't a sustainable growth strategy. Yet Etsy has also filled out its portfolio of seller services and made big improvements to areas like merchant onboarding.
Management clearly sees this strategy as a key path toward higher profits and growth, too. That's why the company is allocating more toward product development, with spending reaching 19% of sales last quarter.
Time to watch
It's too early to tell just how impactful these product improvements will be. Investors can watch metrics like buyer gains and the take rate for indications that the growth strategy is succeeding at accelerating volume growth and making Etsy a more vibrant platform for both buyers and sellers.
The company's solid profit margin and ample cash holdings give management flexibility to keep investing in the business. But most investors will prefer to watch for concrete signs of a rebound before jumping into this beaten-down growth stock.
