Shares of handcrafted goods e-commerce platform Etsy (ETSY 0.34%) dropped 32.3% in 2023, according to data provided by S&P Global Market Intelligence. That drop might not sound so bad. However, the S&P 500 was up 24% last year. Therefore, Etsy stock underperformed by a painful amount for shareholders.
Normally when looking at a full-year chart, investors can see sharp increases and decreases in the stock price, signaling which events were most significant. But in the case of Etsy, the chart below shows that the decline was steady and gradual from about February through November.
I believe words from Etsy CEO Josh Silverman explain what's happening. In December, Silverman lamented: "We need to acknowledge and adjust for today's realities. We are operating in a very challenging macro and competitive environment, and [gross merchandise sales have] remained essentially flat since 2021." In other words, platform growth has completely stagnated for about two years.
This is Etsy's reality. And given this reality, investor enthusiasm gradually cooled throughout 2023.
Wait, isn't Etsy growing?
In 2023, Etsy reported three quarters of financial results. During the first three quarters of 2023, the company had gross merchandise sales (GMS) of almost $9.2 billion -- this represents the dollar amount of products sold on its e-commerce platform during this time.
Etsy had GMS of almost $9.3 billion in the comparable period of 2021, proving Silverman's point -- growth has plateaued.
However, those more familiar with Etsy might already know that its revenue has continued climbing even though platform sales have stalled, as the chart below shows.
ETSY Revenue (TTM) data by YCharts
Sales on the platform don't go directly to Etsy -- they go to its 8.8 million active sellers. For its part, Etsy charges fees to its sellers for various required and optional services.
Etsy is currently earning more from its sellers than it was two years ago, which is why its own revenue is up. But platform GMS is slightly down, which means its sellers are making slightly less. This isn't a good thing when thinking about long-term sustainability.
This is what the market was concerned with in 2023 and it was at the heart of Silverman's December letter. In that letter, the company said it was cutting 11% of its workforce to focus its energy on things that will actually stimulate sales growth for its community of sellers.
Is there any hope left?
"I firmly believe that it is still very early innings for Etsy," said Silverman in his December letter. The company has talked about finding growth by implementing generative artificial intelligence (AI). In short, it believes AI can improve search results for buyers and even identify listings that are more likely to convert due to quality.
Etsy stock is currently cheap and there are reasons to believe true sales growth can pick back up. But the market's concerns regarding the plateauing adoption are valid. Therefore, 2024 will surely be a pivotal year for Etsy's business and its shareholders.
