A huge rally since early 2023 has made it harder for investors to find obvious values in the stock market. That's especially true in the tech world. The Nasdaq Composite index is up 40% in the past year, after all, and many popular stocks have logged gains of double or triple that result.
Etsy (ETSY +0.56%) stock isn't one of these winners. The marketplace platform specialist sat out the recent rally, with shares down more than 30% in a year.
You don't usually see that level of underperformance unless there are some serious concerns about a company's fundamental strength. Yet there's also a good chance that investors are overreacting to short-term operating challenges, potentially setting up a strong rebound for the stock.
That's possible, but it seems more likely the bears are right about the stock right now. Let's look at a few reasons why.
Forgettable records
Many e-commerce giants, including Amazon and Walmart, have put their post-pandemic growth hangovers far behind them as of early 2024. Yet Etsy is still struggling through its demand slump.
NYSE: ETSY
Key Data Points
Sales volumes fell 1% in the holiday quarter, closing out another year of sluggish demand in 2023. That means Etsy's gross volumes essentially stayed flat for two years after jumping nearly 150% during the pandemic spike.
It's hard to keep merchants engaged when their sales volumes aren't rising. That robust engagement is a big reason why Shopify won market share in recent quarters while Etsy lost ground. Investors should keep an eye on the buyer pool, in addition to Etsy's core volume trends, for signs that the business is putting its growth struggle in the rearview mirror.
Profits and cash
Etsy is a profitable business with ample cash flow, and these positive financial factors should only improve with the company's new cost-cutting program. Management sees room to immediately boost the 13% operating margin, perhaps toward peer eBay's 19% rate.
Shopify's recent experience could be instructive, as well, since the e-commerce infrastructure giant engineered an impressive earnings turnaround last year that began with layoffs as part of a wider restructuring program.
Etsy's rebound plan isn't as aggressive, but most Wall Street pros still project solid earnings growth ahead for both 2024 and 2025, even assuming meager sales gains.
Bidding low
The silver lining to Etsy's stock-price slump is that investors now have a chance to buy the business at a big discount. Shares are priced at about 3.4x annual sales, down from pandemic highs of nearly 20x sales. Etsy was trading for close to 6x sales just a year ago. You can now buy the stock for less than you'd pay for eBay, which is much more mature and has fewer long-term growth opportunities.
That's still not a good enough deal to make Etsy stock a clear buying opportunity. The business might be worth owning once there are signs of a return to sales volume and market-share growth, especially when combined with improving profitability. There's a good chance at this profit-margin rebound ahead, but investors should wait for both critical elements before deciding to buy this e-commerce specialist.
