After underperforming the market for several years, Etsy (ETSY +2.08%) is finally bouncing back. The company's shares have climbed 34% over the past 12 months, slightly better than the broader market. If Etsy can maintain this momentum, it may still be time to invest in the e-commerce specialist, especially since its shares remain down more than 70% from their all-time high reached in late 2021. Let's see whether there is more upside ahead for Etsy.
A rejuvenated business
Etsy is going back to the basics. Last year, the company divested Reverb, a marketplace for vintage musical instruments. And in February, Etsy announced it would sell Depop, a fashion-focused online marketplace.
Image source: The Motley Fool.
Etsy wants to focus on its core e-commerce platform, which is primarily geared toward the sale of vintage, handmade, or otherwise unique items. Meanwhile, Etsy's financial results are improving. In the first quarter, the company's revenue increased by 3% year over year to $631.3 million. After reporting a loss per share of $0.49 in the year-ago period, Etsy posted net earnings per share of $0.60 this time around. And although active buyers declined by 2.1% year over year to 86.6 million in the period, the metric increased sequentially -- by just 0.1% -- for the first time in two years. Active sellers grew on a year-over-year basis.
NYSE: ETSY
Key Data Points
Etsy is on the right track, but can the company keep going? On the one hand, one reason Etsy underperformed for years is that the items on its platform aren't exactly cheap, nor are they the essential goods people keep buying during a recession. And with rising inflation and various signs of a possible coming recession, the e-commerce leader might encounter more challenges ahead. However, Etsy's decision to overhaul its business could pay off through improved margins and profits, and better performance in its core marketplace as it focuses solely on that.
The company sees significant opportunities for growth, notably through improved artificial intelligence (AI)-powered algorithms on the platform that help shoppers find what they need more easily and spend more on the marketplace. Further, Etsy benefits from a competitive edge thanks to network effects. The company is known as a leading platform in its niche of the e-commerce industry, and the more buyers on its website, the more it attracts sellers, and vice versa. This same flywheel effect can help improve its AI algorithms: increased platform activity provides it with more data to train on, and so on. Etsy is still looking at a massive long-term opportunity in the growing e-commerce niche.
Lastly, Etsy is trading at just 12x forward earnings, versus the average of 27x for consumer discretionary stocks. Etsy is still somewhat risky given the potential economic challenges ahead. But in my view, it is worth serious consideration at current levels.
