When you think of the best e-commerce stocks to buy, Amazon probably tops the list. The company has increased earnings into the billions of dollars over time thanks to its strength in e-commerce, and it's also the world's biggest player in cloud computing services. This has helped Amazon's shares soar over time, scoring a win for long-term shareholders.
But if you're interested in generating top returns from an e-commerce stock moving forward, Amazon may not offer the most potential. Another player, trading for a song today, might offer your portfolio a bigger boost. I'm talking about Etsy (ETSY 0.34%), a seller of handmade and vintage goods. Its shares have suffered this year, but they have every reason to rebound. Let's find out more about this magnificent e-commerce stock to buy Instead of Amazon.
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Etsy and AI
First, a little background on Etsy. The company offers makers of everything from jewelry to apparel a platform to set up shop and connect with potential buyers. You'll find items in just about every price range, and Etsy's platform, thanks to artificial intelligence (AI), offers you suggestions of items and shops that may appeal to you. Etsy's even testing a generative AI tool to shift searches "from keywords to conversations."
Etsy's revenue already was on the rise prior to the pandemic, but it truly took off as people favored shopping from home in the earliest days and weeks of the crisis.
In more recent times, though, that growth has slowed for two reasons. First, consumers have added in-person shopping back to their repertoire, meaning Etsy faces competition from brick-and-mortar stores. And second, as the economy weighs on consumers' wallets, they're spending less on discretionary items. As a result, Etsy's shares have dropped 33% this year.
Now, let's consider why we should scoop up Etsy shares today. Even in this difficult environment, Etsy has managed pretty well, keeping the growth it gained over the past few years. In the most recent quarter, Etsy announced four-year compound annual growth rates in the double digits for revenue, gross merchandise sales (GMS), and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). This compared the third quarter of this year to the third quarter of 2019.
Etsy also has managed to increase its number of active buyers, reaching a record of 92 million in the recent quarter. And Etsy's habitual buyers have stabilized at about 7 million -- this stabilization is key because habitual buyers keep coming back, offering us some visibility on future revenue.
Etsy is capital-light
The e-commerce company is profitable and has about $1.1 billion in cash -- two more positive points, especially considering today's economic context. Finally, Etsy's business model also should help it weather difficult environments and significantly grow in stronger environments. The company is capital-light, meaning it doesn't have to make huge investments to increase earnings.
For example, the shops on Etsy's platform take care of stocking and shipping their own items -- so Etsy doesn't have to invest in fulfillment capacity. This business structure means Etsy can transform 90% of its adjusted EBITDA into free cash flow.
Now, let's consider Etsy's valuation. The stock is trading for a meager 17 times forward earnings estimates, a steal for a profitable company offering this much growth -- and solid long-term prospects.
So, does this mean we should cross Amazon off our stocks-to-buy list? No. Amazon has what it takes to continue advancing over time, even after this year's double-digit gain. But Etsy, left behind in this year's market rally, might offer your portfolio more of a pop once the market takes into account this company's progress during tough times and winning potential over the long haul. And that's why, if you're looking to buy one e-commerce stock today, Etsy should be your top pick.
