Etsy (ETSY 0.34%) used to be a darling on Wall Street. The stock quadrupled in 2020 and was up 67% before peaking in late 2021, riding impressive fundamental performance.

But thanks to macroeconomic worries, the business has seen its growth grind to a halt. And this has investors losing hope.

Shares of this top e-commerce company have had a terrible year, down 29% (as of Dec. 18). But 2024 could be a different story.

Let's find out if Etsy will be a boom or a bust as we turn the calendar.

Esty's favorable qualities

It's hard to ignore Etsy's positive attributes. For starters, it's an asset-light company that doesn't have to shell out cash for inventory, physical storefronts, warehouses, or trucks. By being an online marketplace that connects 97.3 million buyers and 8.8 million sellers, the business can avoid investing a ton in capital expenditures.

This leads to a very profitable enterprise. Etsy generated $669 million of free cash flow in the last four quarters. The company uses this to repurchase its stock, boosting earnings per share.

Etsy also benefits from the ongoing secular shift toward online shopping. This consumer trend was bolstered by the rise of Amazon over the past couple of decades. But there is still a long way to go.

According to data provided by the Federal Reserve Bank of St. Louis, online shopping represented less than 16% of overall retail spending during the three-month period that ended Sept. 30. It's anyone's guess what the eventual penetration rate might be, but it's not close to being saturated.

There's also growing interest from consumers to support small businesses, an area that Etsy specializes in with its handcrafted and unique product offerings. Plus, more and more people are looking to start side hustles to supplement their main sources of income. Etsy provides a way to quickly set up an online presence and sell goods to a global customer base.

By zooming out, we can easily see that Etsy certainly has some attractive qualities that could be beneficial over the long term. It's also helpful that the stock trades at a cheap forward price-to-earnings ratio of 18. This adds upside from a valuation perspective.

Macro headwinds are causing huge problems

If we focus our attention more on the near term, there could be some challenges in 2024.

There's one factor in particular that can't be ignored, and it's entirely outside of the company's control. I'm talking about the unfavorable macroeconomic backdrop.

Etsy's management team called out consumers prioritizing spending on essentials as a key reason for muted growth in the latest quarter. And as recently as Dec. 13, the company decided to lay off 11% of its workforce due to the challenging environment.

Yes, inflation is cooling, and the unemployment rate is still extremely low, but I don't believe this tells us the whole story.

Consumer confidence, as measured by the University of Michigan Consumer Sentiment survey, is about 30% below where it stood before the start of the pandemic. Credit card debt is at an all-time high in the U.S. And the fact that the yield curve has been inverted since the summer of 2022 indicates that a recession is still a possible scenario. This all points to tougher times ahead for corporate America.

To be fair, there is a bright spot. Etsy shares should perform well if the economy improves next year, and if spending on discretionary items picks up. This will lead to a larger user base, more revenue, and higher profits.

However, I don't believe anyone has any idea whether this will end up happening or not. Economic trends are simply too unpredictable.

All of this is to say that I can see Etsy's stock being a massive winner in 2024. On the other hand, it can also be a complete dud, as has been the case this year.

Long-term investors should pay less attention to the next 12 months and stay focused on the next five years. With this perspective, Etsy looks like a smart stock to buy.