When a company goes one way and its competitors go another, it pays to consider what exactly is going on. E-commerce site Etsy (ETSY 0.34%) has seen its shares lose more than a third of their value over the past 12 months, while Amazon and Shopify have gained 66% and 100%, respectively.
Etsy's declining stock price has attracted bargain hunters looking to buy the stock on the cheap. But before investors start loading up the stock, they must understand the factors behind its poor performance. Only then can they make an informed decision on whether the stock is an attractive investment now.
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Etsy had a great ride during the pandemic
Etsy was a significant beneficiary of the COVID-19 lockdowns, as users had to rely on e-commerce platforms to buy their daily necessities. Sales rose to the roof, propelling Etsy's revenue up by 111% in 2020 and another 35% in 2021 .
The company's performance during the pandemic lockdowns was on par with some of the world's best e-commerce companies. For instance, Shopify grew revenue by 86% and 57% in 2020 and 2021.
Etsy's solid achievement resulted from its emphasis on providing tailor-made, one-of-a-kind items to buyers, differentiating it from traditional online marketplaces like Amazon, which focuses on selling large numbers of affordable and standardized products.
Investors were delighted by Etsy's differentiated value proposition, and they expected the niche e-commerce platform to keep growing its business. Besides, investors predicted that the COVID-19 pandemic would permanently accelerate the digitalization of commerce, leading to a higher growth rate than in the pre-pandemic period.
But Etsy has struggled to sustain its momentum
Unfortunately, investors were overly optimistic with their predictions. Just as the COVID-19 pandemic lifted the e-commerce industry to the sky, the reopening of global economies brought it back to the ground. People reverted to their old habits, rushing back into brick-and-mortar stores to do their shopping and rushing out for entertainment.
Understandably, Etsy's financial performance took a significant hit. For example, gross merchandise sales (GMS) fell 1% in 2022 . Comparatively, GMS rose 107% in 2020 and 31% in 2021. While revenue increased by 10% in 2022 (mainly due to higher take rate), net income fell into the red as Etsy took an impairment charge of $1 billion for its acquisitions of Depop and Elo7.
On one hand, Etsy's weak performance in 2022 was acceptable since all e-commerce companies had a tough time that year. For instance, Shopify's gross merchandise value (GMV) grew 12% in 2022, compared to 47% in 2021. The problem lies in Etsy's inability to turn its business around in 2023, even as its peers (like Shopify) regained growth momentum.
For perspective, Etsy reported a 1% decline in GMS in the first nine months of 2023. In comparison, Shopify reported solid improvements in GMV growth of 15 %, 17 %, and 22 % in the first three quarters of 2023. In other words, Etsy had trouble getting users to spend more money on its platform, even though its peer delivered solid growth in user spending.
Another way to look at this is to consider Etsy's operational metrics. For instance, Etsy's GMS per active buyer has declined in the last six quarters , from $136 to $127 in the third quarter of 2023. The silver lining is that GMS per active buyer of $127 is 25% higher than in Q3 2019, suggesting that Etsy has partially retained the spending growth during the pandemic.
But until Etsy reports a solid improvement in GMS, its turnaround work remains a work in progress.
What's next for Etsy?
Etsy had a tough time trying to rekindle growth of GMS in 2023, which was necessary to restart its growth engine . It also guided GMS to decline in the low-single-digit range for the final quarter of 2023, suggesting that this sluggish performance would continue in the near term.
Hence, investors expecting a quick turnaround in business performance would need to lower their expectations. And since Etsy's stock has no positive catalyst to rebound in the short term, investing in the stock now will likely be a marathon rather than a sprint.
