Shopping for deep discounts can be risky business for investors. A sharp price decline often means Wall Street has reasons to be pessimistic about a company's growth and earnings prospects. These concerns are often short-term in nature, but they can reflect fundamental competitive and financial challenges that will expose your portfolio to unwelcome volatility.
Despite that risk, it's still worth looking at whether a sell-off has gone too far. Investors could see excellent returns from a beaten-down stock that's simply going through a rough patch, after all.
Etsy (ETSY 0.34%) might be in this exact position. The marketplace specialist's shares have been pummeled since reaching their highs in late 2021, potentially setting investors up for a big rebound ahead. Here are a few catalysts that could set the stage for that spike.
1. Low expectations
Etsy has a very low bar it needs to clear to give Wall Street some positive surprises in the coming year. Analysts expect sales to rise just 6% in 2024, even as other e-commerce specialists like Shopify grow at a 20%-plus rate.
Sure, Etsy faces significant demand challenges. Shoppers aren't as excited to spend on the discretionary products that make up most of its sales volume.
But pessimism around lackluster growth trends is already reflected in the stock's valuation. Etsy stock is trading for just 4.2 times sales today compared to nearly 8 times sales earlier this year. That steep decline could set the stage for a rebound in Etsy shares, assuming the company can reaccelerate its sales gains over the coming quarters.
2. Attracting more buyers and sellers
There are encouraging signs the business has already stabilized. Etsy's buyer pool grew for a second straight quarter in Q3, for example, after dropping for much of the past year. Declines in average spending for these shoppers has moderated too. And overall revenue gains are being supplemented by Etsy's rising seller fees and growth in complementary services like advertising and payments processing. The company reported a 7% sales increase last quarter, beating eBay's 5% uptick for Q3.
Investors will want to watch the key growth metrics of Etsy's buyer pool and overall sales volumes. Gross merchandise sales (GMS) were up just 1% last quarter, and there will need to be a rebound there for the stock to reverse its negative trends.
Management is hoping to engineer this acceleration by marketing more toward previously engaged buyers and by making the platform more intuitive. A revamped shopping recommendation engine has the potential to make a big difference here given that Etsy's merchandise skews toward the unique and handmade. That fact sets the company apart from e-commerce peers like eBay, but it also means Etsy has to help customers along more in their shopping experience.
3. Profits and cash trends
Etsy's earnings trends look quite weak today, but they don't reflect the company's wider opportunities. Net income was barely positive last quarter despite growing sales and marketplace revenue. Strip out the impact of one-time charges, though, and you'll see more potential for robust earnings ahead.
Its non-GAAP adjusted EBITDA margin declined only slightly in the first nine months of 2023 to 27.2% of sales. And Etsy generated $410 million of operating cash in that period, up from $391 million a year earlier.
These results came despite Etsy spending aggressively on improving the platform and boosting marketing. More progress in margin expansion, then, is the most direct path toward a rebounding stock price for 2024 and beyond.
