Investors have bid the price of Etsy (ETSY 2.49%) stock higher in recent years due to its ability to thrive in the face of competition from Amazon (AMZN 3.95%) and other large retailers. The company's approach continues to succeed at drawing sellers, buyers, and stockholders alike.
Nonetheless, a market sell-off has also affected Etsy like other internet and direct-marketing retail stocks. The question for investors is whether Etsy has fallen due to inherent shortcomings or because it presents a unique buying opportunity.
Image Source: Getty Images.
What draws investors to Etsy
Etsy has thrived by offering a greater level of service to a specific type of small business. To sell on the site, one must sell vintage items, make artisan goods, or offer craft supplies.
Through these vendors, Etsy has fostered a seller community that would be hard for Amazon to replicate through Amazon Handmade. Additionally, Etsy designed its search tool precisely to match buyers to the goods they seek, reinforcing the site's appeal.
Initially, Etsy focused on the U.S. and Europe. Nonetheless, the company is now making more significant efforts to serve vendors in the developing world who could benefit from these particular connections. Last year, Etsy purchased Elo7, which analysts often labeled the "Etsy of Brazil" before it became part of the company. Such a move could lead to similar actions in other developing countries, helping Etsy serve an addressable market it values at $1.7 trillion.
Etsy's successes
Stockholders will know how Etsy performed for 2021 when it releases its fourth-quarter and full-year results later in February. However, during the first three quarters of 2021, it generated over $1.6 billion in revenue, a 45% increase compared with the first nine months of 2020.
During the first nine months of 2021, its net income amounted to $332 million, 65% more than in the same period in 2020. Increased debt extinguishment costs, interest costs, foreign exchange expenses, and income taxes in 2020 contributed to the higher growth in 2021.
Etsy forecasted between $660 million and $690 million in revenue for Q4, an increase of about 10% at the midpoint. The company blamed retail reopenings, lagging consumer confidence, and supply chain challenges for the slowing growth. Despite growth of around 425% in Etsy stock since its 2015 IPO, the stock price has dropped by about 50% since late November.
Still, its valuation could make Etsy an unstoppable e-commerce stock in 2022. The stock's P/E ratio has now fallen to 47, its lowest level since the spring of 2020 and down from a high of 87 in November. That has also made it cheaper than Amazon, which sells for about 59 times earnings.
Additionally, Etsy supports a $20 billion market cap compared with $1.5 trillion for Amazon. This means that Amazon has to bring in 75 times more revenue than Etsy to achieve the same growth rate, increasing Etsy's appeal to growth investors.
Should investors consider Etsy?
Despite its challenges, investors may want to consider Etsy at its current levels. While its slowing growth rates may concern investors, the market will likely work through the retail reopenings and supply chain challenges over time. Once it reaches that point, growth rates could more closely resemble the more rapid growth rates of the recent past.
Moreover, Etsy is a tiny fraction of Amazon's size, and the developing world appears poised to bring with it a massive addressable market. As the internet retailer captures more of this market share, the company could grow significantly larger over time.
