Even in a bull market like the one we are currently in, investors can find stocks of great businesses that aren't performing well but are still worth buying given their long-term prospects. That seems to be the case with Etsy (ETSY 0.34%) and PayPal (PYPL 2.90%). These companies have encountered issues over the past couple of years, leading to subpar financial results and underperforming stocks.
However, for patient investors willing to hold their shares for 10 years, Etsy and PayPal remain solid buys. Let's find out why.
1. Etsy
The e-commerce industry is booming, and businesses are responding accordingly. There are plenty of platforms for online shopping, which makes it hard to carve out a successful and lucrative niche in this sector. Etsy has managed to do just that. It offers vintage, handmade, and unique goods that are difficult to find in other places. In a 2022 survey, 87% of Etsy's customers agreed: The platform has items they can't get elsewhere.
Etsy has developed a network effect that makes its platform increasingly valuable for buyers and sellers as its ecosystem grows. Still, the company hasn't been at its best recently. Vintage goods aren't known for being affordable. Economic issues have contributed to slowing sales growth for Etsy. In 2023, the company's revenue of $2.7 billion increased by just 7.1% year over year.
ETSY Revenue (Annual YOY Growth) data by YCharts
Though top-line growth has slowed, Etsy's number of buyers and sellers moved in the right direction. A strengthening ecosystem is vital for the company's future. Meanwhile, Etsy is taking steps to right the ship. The e-commerce specialist is aggressively spending on marketing. It is also improving its platform to make it easier for consumers to find what they want.
Etsy recently announced an artificial intelligence-powered feature to help shoppers find perfect gifts for their loved ones. The company is laser-focused on marketing its platform as a gift destination. This new feature is another step in that direction. We will know soon enough whether Etsy's initiatives are bearing fruit. And at any rate, the company's slump, which is partly due to economic conditions, won't last forever.
Etsy has long argued that it has barely scratched the surface of its total addressable market (TAM), which it estimates at $2 trillion in terms of gross merchandise volume (GMS), or the total dollar value of orders conducted on its platform. GMS in 2023 came in at $13.2 billion, a decrease of 1.2% year over year. Still, Etsy can deliver outsize returns over the next decade as it makes significant headway within its TAM.
2. PayPal
PayPal recorded some of the most lucrative quarters in its history during the early days of the pandemic. Since then, revenue growth has slowed, active accounts growth has decelerated, and investor sentiment has shifted, leading to mediocre financial and stock market performances. However, it's important to look at the big picture.
PayPal has been a pioneer in the digital payment industry. The company's brand is famous, recognizable, and trustworthy. That's an important quality to have for a payment processor. PayPal also had 426 million active accounts as of the end of 2023, although that decreased by 2% year over year. It processed $1.5 trillion in total payment volume (TPV) last year, an increase of 13%. PayPal also benefits from a network effect: The more merchants that accept it as a payment method, the more attractive it is to consumers, and vice versa.
The company's entire suite of services also includes its peer-to-peer payment app, Venmo, as well as Braintree, which offers businesses payment processing solutions, fraud protection, data encryption, and more. Braintree is becoming increasingly important to PayPal's results. In 2023, the company's unbranded card processing segment -- comprised primarily of Braintree -- accounted for 35% of TPV, up from 30% in 2022 and the largest single category.
No other segment grew its TPV faster on a year-over-year basis. Maybe that's why PayPal hired Alex Chriss as its new CEO last year. Chriss, a former Intuit executive, has a track record of successfully leading the consumer-facing financial services division of his former employer. That doesn't guarantee PayPal's new CEO will help the company prosper, but it's also important to consider that the fintech industry still has a long runway for growth.
That, combined with PayPal's rock-solid position in the fintech space, network effects, and name recognition, makes it a top pick to profit from the increasing adoption of digital payment methods. So despite not being popular in the market over the past two years, PayPal remains an excellent buy-and-hold stock.
