1 S&P 500 Stock to Buy Before It Soars 105% in 2024, According to a Wall Street Analyst

The S&P 500 advanced 24% in 2023, its third-best annual performance of the past decade. Those gains were largely confined to the technology, communications services, and consumer discretionary sectors. The Magnificent Seven stocks factored heavily into that outcome, as did excitement about artificial intelligence.

Meanwhile, the other eight market sectors underperformed the S&P 500. The utilities, energy, and consumer staples sectors actually declined as investors rotated away from defensive industries, and the healthcare sector was flat as falling demand for COVID-19-related products weighed on certain vaccine makers.

Listed below are the 10 worst-performing S&P 500 stocks in 2023, ranked from biggest decline to smallest decline. All but two stocks came from underperforming sectors.

Source: Morningstar.

Etsy (ETSY 0.34%) is the only consumer discretionary company to place among the 10 worst-performing S&P 500 stocks of 2023, but Morningstar analyst Sean Dunlop see significant upside for shareholders in 2024. His price target of $145 per share implies a 105% upside from the current price.

Here's what investors should know about Etsy.

Etsy benefits from a strong competitive position in a growing market

Etsy struggled last year as inflation suppressed discretionary consumer spending. The company has yet to report fourth-quarter results, but its performance through the first three quarters was mediocre at best. Specifically, gross merchandise sales (GMS) declined by 1.4%, revenue rose by just 8%, and non-GAAP EBITDA increased by just 6% through the first nine months of 2023. But the future looks brighter.

The Etsy brand is synonymous with artisanal, vintage, and handcrafted goods, and many products can even be personalized for individual buyers. In addition, Etsy operates the sixth-most-visited online marketplace in the world and the third-most-visited online marketplace in the U.S. The upshot of those qualities is a unique buyer experience.

Etsy offers non-commoditized inventory at a scale no other company can match. That creates a durable economic moat. The network effect inherent to its business should intensify over time, bringing more buyers and sellers to the marketplace. In turn, Etsy garners more pricing power as its ecosystem expands, simply because sellers have an even greater incentive to participate.

Going forward, retail e-commerce sales are forecasted to increase by 8% annually through 2030. Etsy should be a major beneficiary of that tailwind given its strong competitive position and sensible growth strategy.

Etsy is moving the needle with a sensible growth strategy

Etsy is executing on a sensible growth strategy that aims to engage new buyers and boost buyer frequency. Improving search and discovery is the core element of that growth strategy. Etsy lists 120 million products, many of which are difficult to categorize due to the non-commoditized nature of the inventory. That can be overwhelming for shoppers.

So Etsy is using machine learning models to (1) personalize search results for individual buyers and (2) identify listings that buyers will perceive as high quality. In other words, Etsy is not only using artificial intelligence to make search results more relevant, but also to surface to the most visually appealing products within the circle of relevant results.

Meanwhile, Etsy is trying to build trust with buyers by providing purchase protection, accurate delivery timelines, better tracking information, and more transparent return policies. It will take time to see drastic improvement in buyer engagement, but early results suggest Etsy is moving the needle.

GMS increased slightly in the third quarter, marking the first quarter of positive GMS growth since 2022, and active buyers on the Etsy marketplace have now increased for three straight quarters. Unfortunately, GMS per active buyer continued to decline in the third quarter, meaning each buyer is spending less. But difficult economic conditions are likely to blame.

To quote CFO Rachel Glaser, "We estimate that GMS from our buyers in the top decile of household income increased over 20% year-over-year in the third quarter, a positive indicator that Etsy's overall growth can improve as macro conditions stabilize over time."

Etsy stock trades at a reasonable price

Etsy believes it has captured about 2.5% of its total addressable market, meaning the company has hardly tapped its potential. Morningstar analyst Sean Dunlop expects GMS to reach $40 billion by 2032, implying annual growth of 13% in the interim. That should translate into annual sales growth of roughly 13%, which makes its current valuation of 3.6 time sales look quite cheap, especially when the three-year average is 8.6 times sales.

Alternatively, Dunlop expects operating profit to grow at 20% annually as GMS increases and margins expand. That should translate into annual earnings growth of roughly 20%, which makes the current valuation of 29.6 times earnings look cheap, especially when the three-year average is 49.2 times earnings.

Investors shouldn't lean too heavily on those forecasts, nor should they expect triple-digit returns over the next year. The future is inherently unpredictable. But Dunlop's bullishness lends credit to the idea that Etsy can reaccelerate growth in the years ahead, so patient investors with a five-year time horizon should consider buying a small position in this stock today.