In the last five years, the Nasdaq Composite Index has climbed 112%, a spectacular gain that investors can be pleased with. But not all stocks have done this well.

Take Etsy (ETSY 0.34%). Its shares are only up 24% since February 2019. They even missed the market's impressive rally in 2023. Investors have completely soured on Etsy, which currently trades at a dirt cheap forward price-to-earnings ratio of 15.6.

Before you buy this top e-commerce stock, here are three facts you need to know about the business.

1. Marketplace business model

A typical retailer buys inventory from various suppliers, marks up the prices, then sells it to their customers. Etsy doesn't operate this way. Instead, it runs an online marketplace that connects 96.5 million active buyers and 9 million active sellers, collecting fees in the process.

Consequently, Etsy doesn't own merchandise, warehouses, or trucks. This frees up capital, making Etsy an asset-light company that benefits from powerful network effects. This is a unique business model in the retail industry, more akin to eBay or Amazon's third-party marketplace, and less like Walmart or Target.

Etsy's platform has shown an impressive ability to scale up in a profitable manner. The company reported an adjusted EBITDA margin of 27.4% in 2023, up from 11.8% in 2014. Each marginal transaction that occurs on the marketplace should carry high margins, given that the technological infrastructure is largely built out already.

2. Macroeconomic headwinds

Etsy specializes in unique, vintage, and handcrafted merchandise in a variety of product segments. During the pandemic's height, when people were flush with cash, mobility restrictions were put in place, and the economy was in a zero-rate environment, gross merchandise sales (GMS) and revenue skyrocketed.

In the current economic backdrop, it's been a wildly different story. Etsy was able to grow revenue 7.1% in 2023 thanks to higher fees, but GMS declined 1.2% year over year. Ongoing macro headwinds continue to pressure consumer discretionary spending.

Understanding the current struggles, the leadership team recently announced that it was laying off 11% of the workforce to better match expenses with demand trends.

"While the Etsy marketplace is still more than double the size it was in 2019, we need to acknowledge and adjust for today's realities," CEO Josh Silverman said. "We are operating in a very challenging macro and competitive environment."

If there's a recession on the horizon, no matter how low economists think the chances are, it's hard to be optimistic about how Etsy will fare in the near term. People might delay making purchases until they feel confident about the state of the economy.

3. Massive addressable market

According to executives, Etsy's total addressable market (TAM) is valued at $466 billion. Using its 2023 GMS sum, the business commands just a tiny 2.8% of this massive amount.

Investors should take forecasted market opportunity metrics with a grain of salt. Management teams use these to drum up interest from new and existing shareholders, often severely overestimating the total. Keep this in mind, even with Etsy.

The Etsy management team's TAM figure includes all online sales for relevant product categories in its seven core markets, which include the U.S., Canada, the U.K., Germany, France, Australia, and India. While it's probably not realistic to assume Etsy can capture this entire opportunity, it still shows you that the end market is huge. To me, that still indicates sizable growth potential ahead.

If Etsy is on your watch list, you can use these three facts outlined here to make a better decision about the stock.