Like many other pandemic winners, Etsy (ETSY 0.34%) has recently been going through tough times thanks to a notable slowdown in growth. Consumer behavior has normalized, and macroeconomic headwinds are getting in the way of stronger discretionary spending. This helps explain why market sentiment toward the stock has softened considerably. As of this writing, shares of this top e-commerce company are down 73% from their November 2021 peak price.
Still, it's not time to write this one off. Here are three reasons why Etsy is a growth stock that investors should seriously consider adding to their portfolios right now.
Unique offering
The world of online shopping is incredibly competitive. A typical consumer has a seemingly infinite number of places to spend money in a broad range of product categories. This means that it's absolutely critical for a business to find ways to stand out among the crowd.
Etsy really shines in this regard. Many readers are probably familiar with the fact that the company focuses on selling unique and handcrafted goods, whether it's apparel, jewelry, home furnishings, collectibles, craft supplies, or any other items. This makes Etsy a popular shopping destination for consumers looking for something different.
In fact, a buyer survey revealed that 87% of Etsy shoppers say the site has merchandise that they can't find anywhere else. This is a major competitive edge that this business possesses. And it somewhat insulates Etsy from any in-person or online rivals who are trying to do the same thing.
Macro concerns, like above-normal inflation, higher interest rates, and fears about a recession, can have a negative impact on consumers and their mindsets toward spending. This has certainly created a speed bump for Etsy. However, once the economy is on better footing, Etsy is sure to see its growth pick up.
According to the leadership team, the company's market opportunity in its seven core geographies (U.S., Canada, Australia, U.K., Germany, France, and India) is estimated to be valued at $466 billion. This figure includes only online spending in the relevant product categories. Etsy currently commands a tiny 2.5% share, resulting in huge long-term potential.
Network effects
At a high level, Etsy operates multiple online marketplaces that connect buyers and sellers all across the world. This setup is different from a typical retailer because Etsy doesn't own any inventory, warehouses, or trucks. In other words, this is a capital-light operation, which should be attractive from an investment perspective because it usually results in the generation of lots of free cash flow.
Moreover, a two-sided ecosystem like Etsy's possesses powerful network effects. Network effects are present when the addition of more users to the platform makes it more valuable to all other users.
This is undoubtedly the case here. More buyers who shop on Etsy immediately make the platform more lucrative for existing and prospective sellers due to the simple fact that their targeted customer base is expanding. With more sellers setting up on Etsy, the selection of merchandise for buyers to choose from grows.
By zooming out, we'll easily see network effects at play. In the third quarter, Etsy counted 97.3 million active buyers and 8.8 million active sellers, which were up 117% and 238%, respectively, compared to the same period in pre-pandemic 2019. Again, a larger ecosystem with more stakeholders is just more valuable for everyone.
Gross merchandise sales, which measure the dollar amount of transactions that occur, were 153% higher in the most recent quarter than four years ago.
Cheap valuation
A stock that has gotten so hammered in the past couple of years creates a favorable setup for bullish investors. The shares are selling at a forward price-to-earnings multiple of 16.7, which is ridiculously cheap for a differentiated platform like Etsy that also benefits from powerful network effects. This is an excellent opportunity for investors as the markets go into the new year.
