After registering booming sales during the pandemic, Etsy's (ETSY 0.34%) business has cooled off considerably. Whether it's macro headwinds or the normalization of consumer behavior, growth is difficult to come by these days.

This has pummeled its shares. As of March 4, this leading e-commerce stock is down 77% from its peak price, set in November 2021.

Don't let the disappointing performance of the share price discourage you, though. This remains a top growth stock to buy right now. Here's why.

Standing out

The retail sector is incredibly competitive. Consumers have so many choices in front of them, with rival firms competing on a variety of factors to drive business. The same can be said in the e-commerce space, with Amazon becoming a top player thanks to its low prices, fast shipping, and a huge product selection that provides immense convenience.

But to its credit, Etsy has carved out a successful niche. Its merchandise selection emphasizes unique, handcrafted, and vintage goods that other retailers most likely don't carry. This makes Etsy a truly differentiated platform.

The fact that the business has attracted 96.5 million active buyers and 9 million active sellers (as of Dec. 31) speaks to how well it has caught on with users. Gross merchandise sales (GMS) totaled $13.2 billion in 2023. That figure was down 1.2% from the previous year. The leadership team admits that growth has been difficult to achieve given the challenging macroeconomic backdrop.

Nonetheless, GMS was up 164% from 2019. So Etsy is a much larger enterprise than it was before COVID.

Financial position

Unlike many growth tech stocks, Etsy has proven to be consistently profitable. Due to a one-time $1 billion impairment charge to write off previously completed acquisitions, the company posted a net loss of $694 million in 2022. Including that, Etsy has produced positive net income in six of the last seven years.

Based on historical trends, Etsy operates a scalable marketplace. Credit goes to its asset-light business model, which simply connects buyers and sellers, generating fees in the process. Etsy doesn't own warehouses, inventory, or trucks. This means it has low capital expenditures, mainly because the technological groundwork has already been developed.

The company's operating margin went from 5.1% in 2016 to 13.7% in 2023. And Etsy generates a lot of free cash flow, $666 million in the last 12 months. Management has focused on share buybacks to return capital to investors.

As the company continues to further penetrate the key markets that it's in, it's not unreasonable to expect that GMS, revenue, and net income could rise at a healthy clip in the years ahead.

Cheap valuation

Thanks to its recent poor performance, the stock trades at a compelling valuation. The current forward price-to-earnings (P/E) ratio of 14.6 looks like an absolute bargain-basement valuation for prospective investors. For comparison's sake, the S&P 500's forward P/E multiple is 21, demonstrating just how beaten-down Etsy has gotten. All else being equal, a lower valuation increases the upside for investors.

Etsy might look like a risky stock to own given that its recent struggles don't appear to be coming to an end anytime soon. This is the case with a lot of other businesses that rely heavily on strong consumer spending for their success. Economic uncertainty, due to the unknown impacts of higher interest rates and inflationary pressures, might linger.

But that's where the opportunity lies. For those investors who can focus on the next five years, as opposed to the next five months, Etsy could pay off nicely.