Etsy (ETSY 0.34%) runs an online marketplace that focuses on quality products, including many that are handmade, as a way to differentiate itself from what you might find on many other sites, where the focus is often on low-priced goods. Etsy has experienced significant growth as it has carved out a niche for itself.
But over the past two years, with consumers becoming more price-conscious and inflation putting pressure on household budgets, investors have grown concerned about Etsy. Since 2022, the stock is down more than 60%. Has this just become the latest stock to thrive during the pandemic only to bust on a return to normal, or is Etsy a bargain buy in 2024?
Etsy's business has been slowing down
E-commerce has been volatile in recent years. Amid lockdowns and stimulus payments, consumer spending was strong, and businesses performed better than they otherwise should have. Etsy is no exception, and the following chart helps to illustrate its roller-coaster ride.
ETSY Revenue (Quarterly YoY Growth) data by YCharts. YoY = year over year.
After experiencing a significant boom during the initial stages of the pandemic, Etsy's growth rate has cratered. While a 7% year-over-year growth rate is still decent, especially when consumers are scaling back on their purchases, it may not be enough to get growth investors excited about the stock.
Margins aren't bad but need to be better
If a company isn't generating high levels of growth, then at the very least investors will want to see a strong bottom line. What's encouraging is that although it has been falling, Etsy's operating margin isn't all that bad at just under 14% of revenue.
ETSY Operating Margin (Quarterly) data by YCharts.
The company also recently announced it would be laying off 11% of its workforce so that it can "more closely align our resources with our most important business priorities." Given the potentially challenging economic conditions that lie ahead in 2024, the company looks to be bracing for a slowdown and the need to cut costs to prevent its margins from declining.
How will Etsy do in 2024?
Etsy is an intriguing investment because it's trading at 22 times its estimated future earnings, which isn't a steep multiple by any stretch. The average stock on the S&P 500 trades at a multiple of 21 times its future profits. Etsy's stock isn't trading at a big premium.
The big question is whether investors still think its valuation is too high, given its limited growth. And that's what it all inevitably comes down to -- the growth opportunities this year and beyond. The growing competition from cheap e-commerce sites, including Shein and Temu, could make it difficult for Etsy to lure shoppers to its site. Even though its products are much higher in quality, high credit card debt and limited discretionary income could prevent shoppers from being able to justify making higher-ticket purchases from a site like Etsy.
While it has been generating positive year-over-year growth in recent quarters, there could be more challenges ahead for the business as there's still the potential for a recession this year. And if Etsy's growth rate continues to decline this year, which it may, its earnings may deteriorate. Investors may also be willing to pay less for the stock, given more sluggish growth, resulting in a one-two punch that sends Etsy's valuation into an even deeper tailspin in 2024.
Should you invest in Etsy stock?
Although Etsy stock doesn't look expensive right now, given the headwinds that the business is still facing, I'm not convinced 2024 will be a much better year for the company. Etsy's growth rate could slip into the negative. Management's move to make steep cuts in December is a concerning sign that suggests it doesn't see things improving anytime soon.
Etsy's stock will likely fall further in 2024, and investors are better off avoiding it for the foreseeable future as there isn't a reason to be terribly bullish on its growth prospects right now.
