There's no denying that recent economic malaise has been a bit of a problem for e-commerce outfit Etsy (ETSY 0.34%). Although revenue was up 7% year over year during the third quarter, its gross merchandise volume was only up 1%. And were it not for favorable exchange rates, the handicraft platform's sales would have essentially been flat.
While the quarter's results end a short streak of deteriorating numbers, CEO Josh Silverman conceded, "We are undoubtedly operating in a challenging environment for spending on consumer discretionary items."
Still, the economy is looking increasingly healthier. Data from the U.S. Department of Commerce indicates the country's gross domestic product grew an unexpectedly strong 5.2% in the third quarter, driving corporate profits higher to the tune of 4.3%. Inflation is leveling off too, not only negating the need for more interest rate hikes but perhaps even opening the door to rate cuts. The unemployment rate remains quite low as well.
All of it bodes well for stocks, setting the stage for a new bull market in 2024. Such a bull market may already be underway, in fact. And that's particularly good news for Etsy. Here's why.
1. Economic tepidness has crimped sales
As was noted, inflation-weary consumers are cutting back on discretionary spending to pay for increasingly expensive staples like food, utilities, and toiletries.
ETSY Revenue (Quarterly) data by YCharts
This is a pendulum that swings in both directions, however. If a weak economy is bad for business and a poorly performing market is a drag on Etsy stock, a growing economy and rising market have the opposite effect. Presuming a new bull market is rooted in the usual circumstances of robust economic growth, solid wages, and tempered inflation, Etsy will be operating in an ideal consumer environment.
It's also arguable that many of the recent budgetary shifts are the result of the so-called "wealth effect" (or lack thereof) tethered to the stock market. That is, when the market is doing well, consumers feel wealthier and are willing to spend more money on less-necessary goods like the handmade items Etsy offers.
2. The handcrafted market is still growing
Mass-produced merchandise still has its place within the consumer market. From vacuum cleaners to packaged food to light bulbs to gym socks, there are just some products that don't lend themselves to being made by hand.
All the same, plenty of consumers continue to love the uniqueness and personalization that only a handmade item -- like the ones Etsy sells -- offers. Market researcher Technavio believes the U.S. handicraft market is set to grow at an average annual pace of nearly 9% through 2027, while the global handicraft market is likely to grow by more than 13% per year through 2025.
That latter growth outlook is particularly exciting since nearly half of Etsy's business is done outside of the U.S. There are competitors on this front, to be clear. Amazon manages a handmade goods platform, and arts and crafts supply store chain Micheal's is developing a rival website called Makerplace. And that's just a couple of examples.
Being the first big name to be dedicated to the handicraft market, however, provides Etsy with a serious advantage. As Morningstar analyst Sean Dunlop notes of the company: "Etsy is one of the few companies poised to be a long-term winner in e-commerce. It has built a marketplace of nontraditional, unique, customizable, and artisanal inventory, deriving a competitive edge from a network that grows more valuable as additional buyers and sellers join the platform."
He adds, "After more than doubling its 2019 buyer base, Etsy has likely reached a demand tipping point, heightening barriers to success for new entrants."
3. Several growth initiatives are starting to click
Last but not least, consider stepping into a position in Etsy stock in anticipation of a new bull market because many of its recent overhaul efforts are just starting to gain traction.
Take its search feature as an example. At one point, a broad search performed at the site would have resulted in too many similar products, and not enough differing results to help a shopper refine their search or navigate the platform's listings. Not anymore. A search of the site's listings is now a much more curated experience thanks to changes still being made as of last quarter.
This change should address one of GlobalData retail analyst Neil Saunders' top beefs with the company. He explains: "Etsy doesn't always help itself as the site can seem cluttered and jumbled for shoppers -- both things that damage conversion and weaken average basket sizes. At present it seems that there is far too much product to sift through, which is off-putting."
And that's just one measure. The company is also refining its promotional couponing program, launching its in-house payment platform in more countries, fostering more marketing partnerships with celebrities, and more.
Don't sweat analysts' lackluster view too much
So if the future is so bright, why aren't analysts stoked? The widest swath of them only rates the stock at a hold, while the consensus price target stands at $74.03 -- 5% below the stock's present price. That's not exactly inspiring.
Don't read too much into this ho-hum view. It may well be a case where several analysts are waiting for more members of the analyst community to turn more bullish on the stock so they can safely follow that lead. Indeed, it's this lack of current analyst bullishness that leaves shares poised to rally on the heels of future upgrades and raised price targets.
Even if the analyst community never gets completely behind the company, though, a new bull market and just a little bit of fresh growth could still work oversized wonders for Etsy stock.
