Though many growth stocks skyrocketed last year, leading the three major indexes higher, some quality players got stuck on the sidelines. And one of those promising players is Etsy (ETSY 0.34%), an e-commerce company that connects sellers of handmade items with buyers. In fact, over the past three years, the stock has dropped about 66%.
Investors worried that customers, watching their wallets amid rising inflation, may put off discretionary purchases -- and these cautious investors haven't been entirely wrong. Etsy has posted quarters of declining gross merchandise sales (GMS) in 2022 and into last year. But, in recent times, the situation has started to brighten, and Etsy's long-term prospects look promising. These two factors could help this magnificent growth stock roar higher in 2024. Let's find out more.
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Etsy's early pandemic performance
First a quick look into the past. Etsy's earnings soared in earlier pandemic days as shoppers favored e-commerce, and as a result, the shares climbed too. Then, a few factors began to hurt earnings and share performance. Customers returned to their usual buying habits, including in-store shopping, meaning more competition for e-commerce players like Etsy. As mentioned above, rising inflation began to hurt shoppers' buying power. And finally, other headwinds like negative foreign currency impact held back earnings growth.
But, amid these challenges, it's important to note that even in times of earnings declines, Etsy kept the gains it made earlier in the pandemic. For example, in the most recent quarter, Etsy reported four-year compound annual growth rates in the double digits for GMS, revenue, and adjusted EBITDA.
And today, Etsy is reporting various "green shoots" that could signal growth ahead. The company's GMS rose 1.2% -- improvement from the previous quarter's 0.6% decrease. And active buyers increased 4% to reach a record high of 92 million. That's up from a 3% increase in the previous three months.
At the same time, a look at the economy shows pressure on the consumer may start to lift. Analysts predict the Federal Reserve, after raising interest rates 11 times since 2022, will halt increases and even cut rates later this year. This eventually should work in favor of companies, like Etsy, that depend on consumer spending.
Now, let's consider Etsy's long-term prospects. Etsy has significantly grown its business from pre-pandemic days, reporting $3 billion in GMS in the most recent quarter and net income of $87 million. Yet the market growth opportunity remains significant: Etsy holds only a 2.5% share of a $466 billion total addressable market.
Etsy's market share efforts
Etsy aims to boost its market share by increasing its number of active buyers, the frequency of their purchases, and the value of their purchases. It's working on these points by improving its search capabilities so buyers can easily find just the right item, and by making good value and reliability priorities.
Finally, here's one more big thing to like about Etsy, and that's the company's capital light business structure. Etsy doesn't have to make major investments in areas like infrastructure or transport -- its sellers stock and ship their goods. And this means Etsy has been able to transform 90% of adjusted EBITDA into free cash flow. On top of this, the company has $1.1 billion in cash, further brightening the financial picture.
Meanwhile, Etsy shares today are trading for only 14x forward earnings estimates, an absolute steal considering the company's business model, earnings progress so far even through a tough economic environment, and financial strength. This means bargain-hunting investors with an eye for a solid long-term growth story may flock to Etsy today and in the months to come. And if that happens, this top-quality growth player, after a couple of years in the doldrums, may finally roar higher in 2024.
