Down by more than a third in the last 12 months, Etsy's (ETSY +1.10%) stock is getting mixed reviews from the bulls and bears.
The bulls think that Etsy's unique proposition positions the niche marketplace to gain market share in the long run. The bears, however, question whether Etsy can regain its growth momentum after delivering sluggish performance in the last two years.
I'll delve into the arguments presented by both sides, which should give investors a balanced view of Etsy's prospects as an investment opportunity.
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The bullish case for investing in Etsy
The e-commerce industry is a highly competitive arena dominated by leading companies like Amazon and Shopify. To survive, smaller companies must offer something unique to their buyers to carve out a niche for themselves. And that's precisely what Etsy has been doing over the years.
Etsy helps small sellers sell their products to buyers globally. These items are usually tailored to customers' needs, providing them with one-of-a-kind type of products that they don't find on mass-market platforms like Amazon.
Not all customers seek these kinds of unique products, since they usually come with a higher price tag. But there are enough of these customers globally, and Etsy helps connect them to sellers. The result is a win-win. Sellers make a decent return for their products, customers get a product they can't find anywhere else, and Etsy receives a commission to facilitate the trade.
Etsy's unique proposition differentiates it from its bigger peers, making it highly profitable even though it operates on a much smaller scale.
For perspective, Etsy had been delivering positive free cash flow even before the pandemic started in 2019, and that figure has been hovering above $600 million in the last three years (2020-2022). The free-cash-flow margin was around 25% in 2022.
Etsy estimates that its total addressable market is worth $466 billion, giving it a market share of only 2.5% as of 2022. It is not hard to see that Etsy has significant untapped potential, which should keep it busy for many years.
NYSE: ETSY
Key Data Points
The bearish case for staying away from Etsy
One of the biggest concerns that the bears have is Etsy's recent struggle to grow after global economies reopened in 2022.
For instance, Etsy reported a disappointing performance in 2022, with gross merchandise sales (GMS) falling 1% in 2022, a remarkable turnaround from the growth of 107% in 2020 and 31% in 2021. Worse, the company had to write off $1 billion from its poorly timed acquisitions of Depop and Elo7, which resulted in overpayment.
It didn't help that Etsy's sluggish performance continued in 2023, even when bigger peers like Shopify regained growth momentum.
In the third quarter of 2023, Etsy reported that GMS grew by 1.2% and revenue increased by 7% (mainly due to higher take rate). Comparatively, Shopify grew gross merchandise value by 22% and revenue by 25% in that period. It seems like Etsy is having a tough time trying to rekindle growth.
While the bulls point out that Etsy's poor stock performance in the last 12 months (declining by more than 30%) provides a good entry point to buy the stock, the bears argue that Etsy's valuation is not attractive even after the recent price correction.
For instance, Etsy trades at a price-to-sales (P/S) ratio of 3.9. While lower than its five-year average of 9.7 times, it is still a premium compared to other e-commerce platforms like Amazon and Alibaba -- which have P/S ratios of 2.8 and 1.5, respectively.
Unless Etsy can restart its growth momentum, it would be challenging for the stock to regain its prior premium valuation.
What it means for investors
The bulls and bears have good reasons to hold their views.
Etsy's investors must balance its short-term challenges and the possibility of the company regaining its growth momentum in the longer term.
In any case, Etsy is not a screaming buy at the moment, even though it's trading on the lower end of its historical spectrum. Potential investors should patiently wait for the company to turn around its business performance and, hopefully, its stock performance.
