Etsy (ETSY 0.25%) continues its disappointing streak. After a remarkable run in the years leading up to their all-time high in late 2021, shares have tanked in dramatic fashion. As of this writing, they trade 83% off the peak.
Investors might believe a turnaround is in the cards in the not-too-distant future. While growth has slowed, this business does possess some favorable traits. This at least warrants a closer look.
But is Etsy stock your ticket to becoming a millionaire? The answer is clear as day.
Declining spending activity
A lot of internet-enabled businesses benefited greatly from the COVID-19 pandemic. Etsy was one of them, thanks to the rising popularity of online shopping that took off in 2020. The company was registering monster growth, which led to huge investor returns.
But growth has been hard to come by in recent years. Gross merchandise sales (GMS) decreased 4.4% year over year to $12.6 billion in 2024. This figure was 7% lower than the record of $13.5 billion in 2021. In fact, 2024 was the third straight year that a decline was reported. Management called out a combination of pressured discretionary spending, the competitive environment, and a shorter holiday season as reasons for the weak results in the latest quarter.
It doesn't help that the user base is also going backward. As of Dec. 31, 2024, Etsy counted 95.5 million active buyers and 8.1 million active sellers on the platform. Both of these figures were lower than exactly 12 months before.
NYSE: ETSY
Key Data Points
Positive factors
By zooming out, investors will notice some attractive qualities that Etsy possesses. For starters, it benefits from network effects due to its two-sided platform. When more buyers and sellers join, it becomes more valuable to existing users.
Etsy operates in the e-commerce industry, which is a growing market. In the U.S., more than 80% of retail spending still happens in brick-and-mortar settings. And according to Grand View Research, money spent shopping online will rise at a nearly 19% annualized pace between now and 2030 globally. In theory, this provides Etsy with a powerful tailwind to work with.
The company is consistently profitable. In the past five years, Etsy's operating margin has averaged 18.1%. And in 2024, it produced $709 million in free cash flow.
These positive factors are certainly worth calling out, as they highlight some notable variables that make Etsy a solid business. However, they don't take away from the fact that the company's fundamentals continue to trend in the wrong direction.
Diversification is key
If Etsy is able to get back to solid GMS and user growth, which in turn boosts revenue and earnings in a consistent manner, then I can definitely see a scenario where the stock generates monster returns. That's because the market has become extremely pessimistic, with the shares trading at a cheap forward P/E ratio of just 8.9. That's less than half that of the overall S&P 500.
Better fundamental performance, coupled with improving investor sentiment, can provide the necessary ingredients for the share price to soar. This is especially true when the starting valuation is as low as it is for Etsy.
However, my confidence in such a favorable outcome happening is not high at all, given the facts. Based on the company's recent financials, it's safe to say that Etsy likely isn't your ticket to becoming a millionaire.
Even if the situation were more attractive, investors should avoid thinking that a single stock can send them on a path to riches. At the end of the day, building a diversified portfolio of businesses is the best way to invest your hard-earned capital.
