While the giant tech companies tend to steal the attention during earnings season, investors shouldn't hesitate to look at smaller businesses that might fly under the radar. Etsy (ETSY 0.34%) is one such company. It's not getting love from Wall Street because its growth has stalled in the current economy.
But don't be discouraged. Although Etsy is down 75% from its peak price (as of Feb. 2), it's definitely a growth stock you want to buy right now.
Etsy's challenges are hard to ignore
Selling unique, specialized goods during the pandemic helped Etsy thrive. It posted monster growth in 2020 and 2021. However, things started slowing dramatically in 2022 and into last year. Through the first nine months of 2023, the business reported gross merchandise sales (GMS) of $9.2 billion, equaling a 1.4% year-over-year drop.
A less favorable macroeconomic environment, characterized by ongoing inflationary pressures and higher interest rates, discouraged shoppers from spending on discretionary items. Because Etsy's top product categories are things like home furnishings, jewelry, and apparel -- purchases that people can delay if times get tough -- the company felt the impacts acutely.
Last December, management made the difficult decision to lay off 11% of the workforce. "We are operating in a very challenging macro and competitive environment, and GMS has remained essentially flat since 2021," CEO Josh Silverman said in a statement. It's hard for investors to be optimistic about the near term when executives make a move that seems to point to soft demand continuing.
It's no wonder the stock tanked 32% in 2022, seriously underperforming both the S&P 500 and the Nasdaq Composite.
Etsy has serious potential
It's easy to get caught up in the latest macro trends and business results. But long-term investors should always focus on the company's fundamentals and how they might shake out over several years. Viewed in this light, Etsy possesses strong potential.
The business continues to expand its user base. Active sellers and active buyers now total 8.8 million and 97.3 million, respectively, both up sequentially and year over year. Why do people still flock to this marketplace? Well, it's because Etsy is the top online platform in the world that's specifically focused on specialty merchandise, with 651 million visitors to its website in December 2023.
Etsy provides its sellers with tools -- like payments processing, ads, and shipping labels -- that they need to better run their online shops. And for buyers, the focus has been on improving search and discovery features, particularly machine learning capabilities, to help shoppers more easily find exactly what they are looking for.
It's all about supporting Etsy's powerful network effects. By enhancing the experience for both of its user groups, and by connecting buyers and sellers across the globe, the business is trying to drive engagement, spending, and higher revenue.
That's not to say that running a successful two-sided platform hasn't already been incredibly lucrative. Etsy's operating margin has averaged 16.4% over the past five years. As GMS hopefully continues rising in the years ahead, the company's scalable and asset-light business model should shine, translating into strong free-cash-flow generation.
At a forward price-to-earnings ratio of just 15.7, now is as good a time as ever to buy Etsy stock. Yes, the current economic backdrop hasn't been the best for this company. But the good news is that the economy spends far more time in expansion mode than it does in downturns. This presents a rare opportunity to buy a competitively advantaged business at a steep discount -- something long-term investors shouldn't ignore.
