While many consumer goods stocks rallied this year, one in particular sat on the sidelines. I'm talking about Etsy (ETSY 0.25%), an e-commerce company that offers artisans a platform where they can sell their creations. The stock is heading for a 27% loss in 2023 -- and that follows a decline of more than 45% last year.
After watching Etsy's shares and earnings soar during the earlier stages of the pandemic, investors worried the company wouldn't keep up the momentum as consumers returned to in-person shopping. Etsy did see growth slow, and a weakening economy weighed on the business, too. But Etsy also has offered us reasons to be hopeful about the company's future -- and the shares' potential. Could the stock win big in 2024?
Image source: Getty Images.
Etsy's headwinds
First, let's consider the headwinds. Like other consumer-oriented companies, Etsy has had to deal with rising inflation's impact on the consumer's wallet. And this has hit the company particularly hard since Etsy can't fall back on sales of groceries or essentials, such as a player like Amazon. Etsy's sellers offer discretionary items, or those that fall to the bottom of shopping lists when times are tough.
On top of this, other factors -- like unfavorable currency exchanges and the consumer's shift to spending on services over goods -- also have hurt the company. All of this has held back revenue growth and the growth of Etsy's active and habitual buyer bases.
Now let's move on to the positive points. Though Etsy hasn't reported the triple-digit increases in gross merchandise sales (GMS) we saw earlier in the pandemic, the company has kept its gains from the past couple of years. For example, it recently reported four-year compound annual growth rates in the double digits for third-quarter GMS, revenue, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Last year, Etsy Marketplace GMS reached more than $11 billion, up from $4.7 billion in 2019 -- before the pandemic-related boost.
NYSE: ETSY
Key Data Points
A return to growth
Etsy also saw GMS return to growth in the most recent quarter after declines in the first half of the year. The company's habitual buyers stabilized at the level of about 7 million and its active buyers increased 4% to a record of 92 million. The stabilization of habitual buyers is particularly important since they keep coming back to Etsy -- so this sort of trend gives us reason to be optimistic about future revenue.
This leads me to the subject of Etsy's financial situation. The company is profitable, generating more than $87 million in net income in the recent quarter and also has a solid cash position of $1.1 billion.
On top of this positive point, Etsy's capital-light business structure means it doesn't have to make heavy investments in things like infrastructure to grow. Instead, Etsy can choose to invest as needed in areas such as artificial intelligence (AI) to optimize searches on its platform or improve its app. All of this helps the company convert about 90% of its adjusted EBITDA into free cash flow.
It's time to return to our question: After Etsy's tough times, can the stock win big in 2024?
Etsy's recent earnings reports show the company is moving in the right direction. GMS has shown some growth, buyer trends are improving, and the company continues to maintain a solid financial situation. Meanwhile, Etsy shares now are trading at only 18x forward earnings estimates, down from more than 30x earlier in the year.
It's impossible to predict whether Etsy -- or any other stock -- will rise or fall in the new year. But it's fair to say Etsy looks ripe for a rebound and has what it takes to recover and advance in the future. If this happens in 2024 -- wonderful! But if it doesn't, I think it's just a matter of time -- and that makes Etsy a fantastic addition to any long-term portfolio.
