Etsy (ETSY 0.34%) benefited tremendously from the pandemic, when consumers had extra cash to spend and turned their attention to online shopping. However, growth has slowed as higher interest rates and inflationary pressures hurt discretionary spending activity.

As a result, this e-commerce stock has gotten crushed -- dropping 45% in 2022 and 32% in 2023. Etsy's shares currently sit 73% below their all-time high price, and that could make this growth stock a smart buying opportunity. Let's take a closer look.

Carving out a successful niche

When investors think about the e-commerce sector, Amazon is probably the first company that comes to mind. The tech giant attracts nearly 40% of all online spending in the U.S.

But by focusing not on mass selection, low prices, or convenience, Etsy has carved out a niche in the competitive industry. Etsy's marketplaces focus on handcrafted, vintage, and unique goods that 87% of buyers say that they can't find anywhere else. This protects the business from the presence of a giant like Amazon. In other words, when shoppers need to find a special item to buy, Etsy will be at the top of their minds.

Besides a differentiated offering that protects Etsy's position, the company is also supported by network effects. Its 91.6 million active buyers and 6.7 million active sellers (on the Etsy marketplace) benefit as the platform gets larger. Buyers have more options to choose from and merchants to shop at. And those sellers gain access to a massive global buyer base. The marketplace becomes more valuable to all stakeholders.

Network effects underpin Etsy's economic moat. And this gives me confidence that the business will still be in a strong industry position years into the future, despite competitive threats that will surely present themselves at one point or another.

Headwinds to tailwinds

As I noted above, rising interest rates and inflationary pressures have been a major headwind for a company like Etsy. When consumers are spending more of their income on essentials, there's less money to go toward discretionary items, which are Etsy's specialty. This helps explain why gross merchandise sales (GMS) through the first nine months of 2023 dropped 1.4% compared to the same period a year earlier.

Even the management team, led by CEO Josh Silverman, called out the "very challenging macro" environment when deciding to lay off 11% of the company's workforce. The focus is primarily on driving greater efficiencies across the organization.

The positive way to view this is that Etsy is positioning itself for a more favorable macroeconomic backdrop. Many economists believe that the Federal Reserve will lower rates multiple times throughout the course of 2024. And this could be a boon for consumer confidence and spending behavior.

For Etsy, the result would be greater GMS on the platform, which will lead to higher revenue and earnings. This positive fundamental trend could be a boon for the stock price.

The valuation is cheap

As of this writing, Etsy shares trade 73% below their peak price from November 2021. They're cheap. The forward price-to-earnings ratio of 17.3 is about half the average valuation over the past three years. This is also a sizable discount to the S&P 500's multiple of 21.6.

Can someone who understands the fact that Etsy is a profitable, financially sound, and competitively advantaged business really think that this is a worse-than-average company? I don't think that's the case at all.

At the current valuation, Etsy looks like a no-brainer stock to buy right now.