Investing in growth stocks requires a lot of patience and a tolerance for pain. A growth stock could go up much faster than the market, but it could also fall a lot harder.

Such is the case of Etsy (ETSY 0.34%). The once high-flying stock, fueled by a deluge of early pandemic purchases, is currently suffering a massive hangover in its earnings three years later. Shares currently trade around 77% below their all-time high reached in 2021.

To be sure, Etsy's most recent earnings report was disappointing. Gross merchandise sales (GMS) fell 0.7% year over year, ending the full year down 1.2%. Guidance wasn't very inspiring, either, with management expecting another year-over-year decline in GMS.

But right now could be a great time to buy Etsy stock. Here's why.

A durable competitive advantage

Etsy's position as the leading marketplace for non-commoditized and customizable products is untouchable. And that competitive advantage shows up in its finances. Despite the declining merchandise sales in the back half of the year, Etsy still managed to grow revenue. Revenue climbed 4.3% in the fourth quarter and 7.1% for the full year.

How can a marketplace grow revenue despite producing fewer sales for merchants? Simple: It's taking a bigger bite of the apple. Etsy's seller fees increased from 5% to 6.5% in 2022. It's also pushing more sellers to use its advertising platform. As a result, the take rate has climbed from 17.8% before the fee increase to 21% in its most recent quarter.

One might think increasing the take rate would motivate sellers to find another marketplace to sell their goods on, but that hasn't been the case. While it initially saw some pushback, active sellers have increased from 7,654 before the price hike to 9,035 by the end of 2023. That speaks to the fact that Etsy is the place where consumers shop for customizable and other non-commoditized products.

The competition is winning right now, but the tide will turn

Etsy's fourth-quarter earnings presentation included a couple of slides comparing its performance relative to the overall e-commerce industry, as well as in select categories.

The recent pattern is clear. Against the backdrop of the overall e-commerce market, Etsy has been losing share over the last two years after several years of well-above-average growth. But if you zoom in on categories like apparel, toys and games, and party supplies, Etsy is doing much better than pure-play e-commerce companies in those areas.

CEO Josh Silverman provided more context during Etsy's earnings call. He said Amazon, Walmart, Temu, and SHEIN are the only e-commerce companies gaining share right now. And the reason they're currently winning is because they're able to offer better prices than anyone else either through economies of scale or simply outspending everyone. (Temu also dropped about $50 million on Super Bowl ads and promotions.)

Currently, there's a preference for the cheapest version of a product. There's a lot of economic uncertainty and inflationary pressures are still very strong. But Silverman believes the tide will turn eventually, if not soon. And when you look at how Etsy holds up against direct competitors in its biggest categories, it's encouraging to know that when people return to more specialty retailers, Etsy stands to benefit more than others.

The stock price is dirt cheap

After several quarters of disappointing gross merchandise sales growth, investors have severely punished Etsy stock. And while it might not have deserved the sky-high valuation it was trading for in late 2021, the stock looks downright cheap today.

Shares currently trade at a forward price-to-earnings (P/E) ratio of just 19.4. That's lower than the S&P 500 despite the fact that analysts are expecting average earnings growth of 22.6% over the next five years. That also means Etsy's PEG ratio is less than 1, which is a sign the stock is undervalued.

Etsy is also cheap on a price-to-sales measurement. It trades for less than 3 times forward sales estimates. As revenue reaccelerates from a turnaround in GMS and higher take rates, that multiple should prove to be far below fair value.

To be sure, an investment in Etsy will require patience. But management has done well to hang on to its pandemic-fueled gains and improve its standing in hand-crafted and non-commoditized products. As long as that position stays intact, investors should feel comfortable holding the stock, even if its price is volatile.