Investors have not been too pleased with Etsy (ETSY -0.19%) in recent years. After shares of the online marketplace for unique and handcrafted goods soared 380% in the five years leading up to their November 2021 peak, they have come crashing down, currently sitting 79% off that high.

The e-commerce business just reported first-quarter 2024 results that disappointed investors, sending the stock even lower. At a forward price-to-earnings ratio of 13.5, the shares might be too hard to ignore at this point.

Here are three things to know about Etsy stock.

Platform business model

Etsy isn't like a typical retailer. It doesn't buy and store inventory, and it doesn't invest in warehouses or fulfillment centers. Instead, it is a technological platform that connects buyers and sellers worldwide. Etsy facilitates transactions, providing an online storefront, payments, ads, and shipping services, and collecting revenue in the process.

What's attractive about this business model is that it benefits from network effects. As more buyers and sellers join the platform, Etsy's services immediately become more valuable to all stakeholders. This means that it would be an extremely difficult task for an upstart to create a rival marketplace from scratch.

This economic moat protects Etsy's competitive standing. And that's an important quality that investors should be looking for.

Dealing with macro issues

Etsy experienced tremendous demand during the height of the pandemic, when people were particularly interested in buying face masks. That monster growth has come to a screeching halt.

During the first three months of this year, Etsy reported gross merchandise sales (GMS) of just under $3 billion, which was down 3.7% year over year. That figure has remained relatively flat since Q1 2021.

Management once again criticized the uncertain macroeconomic environment. Higher interest rates and ongoing inflationary pressures don't drive greater consumer spending on discretionary items. Because Etsy's top product categories, like home furnishings, jewelry, and apparel, can be held off in tougher economic times, the business is severely impacted.

It's encouraging, though, that Etsy grew its base of active buyers and active sellers by 0.9% and 15%, respectively, compared to 12 months ago. Perhaps this is a leading indicator that when the economy gets on a stronger footing, there will be pent-up spending activity.

Large growth opportunity

It's easy to get caught up in Etsy's latest challenges. But investors who are looking to scoop up shares should focus on the bigger picture. It's obvious that Etsy still has a large growth opportunity in front of it.

According to the management team, the total addressable market (GMS opportunity in online retail, key product categories, and seven core geographies) is estimated to be $466 billion. Etsy handled about $12 billion of GMS in 2023, giving it a tiny 2.5% slice of that massive business opportunity. Of course, it's safe to assume the business won't come anywhere close to capturing this entire market, but you get an idea of the company's potential upside.

It also helps that Etsy is benefiting from some key tailwinds. For starters, online shopping still only commands a small fraction of overall retail. As consumers continue favoring this more convenient method of spending, it creates a favorable backdrop for Etsy to grow GMS and revenue.

These two other tailwinds are more anecdotal. On the one hand, consumers might be showing a greater interest in supporting small businesses, a group that Etsy caters to. Additionally, the rise of side gigs and entrepreneurship to boost income naturally draws more people to want to sell things online and set up shop on Etsy.

Understanding the business model, its recent financials, and growth prospects should give investors some basic info before they make a decision about Etsy stock.