Having exposure to the S&P 500 in recent times has been a fruitful endeavor. The broad index of 500 large and profitable U.S. businesses has generated a total return of 96% in the past five years, virtually doubling one's capital. That's a fantastic outcome.

Not all companies have performed even remotely as well for their shareholders. Etsy (ETSY -1.61%), for example, is actually down 4% since August 2019. The online marketplace has disappointed in remarkable fashion.

But can this beaten-down growth stock, now trading 82% off its late 2021 peak, skyrocket and beat the S&P 500 over the next five years? Here's what investors should know.

Post-pandemic slump

In 2020 and 2021, Etsy posted gross merchandise sales (GMS) growth of 107% and 31%, respectively. The business experienced monster success thanks to the surge in online shopping during the depths of the COVID-19 pandemic. It's no wonder the shares soared 837% from the March 2020 low to their all-time high in November 2021.

However, this pandemic darling has since been dealing with a slump. Through the first six months of 2024, GMS totaled $5.9 billion. This was down almost 3% year over year. "While this is a challenging environment for our type of goods, we are focused on reigniting Etsy marketplace growth and gaining market share," CEO Josh Silverman said.

Although inflation has cooled dramatically in the past couple of years, there's no doubt that consumers continue to feel the pinch. As households focus more of their budgets on essentials, like gas, food, and shelter, discretionary purchases will certainly be less of a priority.

Positive attributes

It's definitely troubling to see a stock in the red over a five-year period. However, Etsy is still a competitively advantaged business that possesses favorable characteristics investors shouldn't ignore. For starters, the platform keeps adding more users. The number of active buyers and active sellers increased compared to the year-ago period. I believe this shows the value they're finding on the site.

And because of this two-sided marketplace, Etsy has a moat in the form of network effects. The company doesn't own inventory or warehouses. It simply connects buyers and sellers across the globe, earning fees in the process. The larger the platform gets, the more valuable it becomes to everyone.

Etsy focuses on unique, vintage, handcrafted, and specialty items. In fact, 83% of buyers said that the site has merchandise that they wouldn't be able to find anywhere else. This is a clear differentiator that showcased Etsy's value proposition.

The e-commerce industry is dominated by Amazon. No one would dispute that. But Etsy has successfully carved out its corner of the market by adopting a totally different approach of not trying to win on speed of delivery and avoiding mass-produced products.

The fact that this business is consistently profitable might also go unnoticed. In the past five years, Etsy's operating margin has averaged a healthy 15.9%. Generating free cash flow also isn't a problem.

Etsy is a contrarian bet

The market has completely soured on this business. Shares continue their downward spiral this year, falling some 33% so far in 2024. I understand that this is a difficult investment to make.  But realize that the stock is dirt cheap right now. It trades at a forward price-to-earnings ratio of just 12, which is a whopping 46% discount to the S&P 500.

Provided that Etsy returns to posting solid GMS and earnings growth, I think the valuation multiple will start to expand. While I don't necessarily think the stock will skyrocket, there's still a good chance it can beat the S&P 500 in the next five years, particularly as the market's expectations have gotten so low.