Title: Is Etsy's 81% Slump Since November 2021 a Once-in-a-Decade Bargain? An Unfiltered Take
The S&P 500 is on a roll, reaching new heights, but not every business is riding this wave of success. Take Etsy (ETSY), for instance, which has seen a staggering 81% drop from its peak in November 2021. Investors might be wondering if this is a once-in-a-decade buying opportunity.
Navigating Challenges
Etsy's business thrived during the pandemic as people opted for online shopping. The platform experienced a whopping 107% and 31% growth in gross merchandise sales (GMS) in 2020 and 2021, respectively. However, things have settled down since then. Consumer behavior has normalized, brick-and-mortar stores are bouncing back, and macroeconomic headwinds have surfaced.
These factors have taken a toll on Etsy. In the third quarter, the company reported a $2.9 billion GMS, a 4.1% decrease compared to the same quarter the previous year. Management pointed to decreased discretionary spending as a significant contributor to these results. Moreover, the number of active buyers and sellers on the platform also decreased in the third quarter.
The Federal Reserve's plan to lower interest rates could potentially provide Etsy with a much-needed demand boost. But as of now, the company expects its GMS to decrease to low to mid-single-digit percentages in the fourth quarter compared to the same quarter the previous year.
Positive Aspects
Despite the challenges, Etsy remains a business with several positive qualities. The company has consistently posted strong earnings, boasting an average operating margin of 16.2% over the past five years. Its ability to generate positive free cash flow is further proof of its sustainable business model.
Etsy also enjoys an economic moat, thanks to its massive two-sided marketplace. The platform benefits from network effects, which makes it attractive to small merchants looking to sell their goods online. With a vast assortment of 8.5 million sellers worldwide, Etsy offers a wide range of products to shoppers. It becomes stronger as it grows.
What sets Etsy apart in the competitive e-commerce industry is its unique offerings. A notable 83% of buyers agree that they can't find similar items anywhere else. This differentiation is crucial in the cutthroat e-commerce landscape, especially when competing against giants like Amazon.
Compelling Valuation
Etsy's stock is currently traded at an 81% discount from its peak over three years ago, making it an attractive buy for long-term investors. Shares trade at a relatively low forward price-to-earnings (P/E) ratio of 12.9, while the broader S&P 500 trades at a multiple of 23. The market's pessimism toward the company appears unwarranted, considering its resilient business model and unique offerings.
Patience is a virtue, particularly in the investment world. Etsy could be a stock that rewards the patient investor. As economic conditions improve, the business might regain its growth trajectory, and the stock's valuation will likely follow suit.
While it may not be a once-in-a-decade buying opportunity, Etsy still holds potential as a long-term investment for those willing to weather the existing challenges.
Based on Etsy's current financial situation, some investors might consider reallocating their money towards the company's shares for potential long-term gains. The company's strong earnings and positive free cash flow indicate a sustainable business model, which could yield profitable returns in the future.
With Etsy's stock trading at a significant discount compared to its peak, now might be an opportune moment for investors with a long-term focus to consider investing in this company's finance, potentially gaining profit while supporting small businesses thriving on the platform.
