You’re likely familiar with Etsy’s business model.
The E-commerce giant (known for its unique marketplace connecting buyers with artisans globally) has increased revenue and usage yearly since its IPO in 2010.
Things got much better during COVID-19 as the pandemic supercharged its growth, from $818 million in revenue in 2019 to $1.72 billion in 2020.
However, the story has changed recently (and that bodes well for bargain hunters) thanks to a unique entry point that could yield substantial gains.
Here’s the long story short:
The current market landscape and increasingly tough economy (marked by flat gross merchandise sales since 2021) require Etsy to streamline costs and optimize resources. Hence, the decision to cut 11% of its workforce, including leadership changes, such as the departure of the chief marketing officer (CMO) and consolidation of his role under the chief operating officer (COO).
Initially, the markets didn’t react well to news of layoffs.
But the big “thumbs down” came after Etsy updated its fourth-quarter expectations, anticipating a 1-2% drop in gross sales year-over-year, with revenue poised to grow by 2-3%. Etsy shares fell by 7% after the announcement, and the latest outlook from many analysts isn’t necessarily encouraging.
However, my optimism springs from the company’s focus on reigniting growth, enhancing sales, and delivering value to stakeholders amidst these changes.
Plus, the stock sits 72% below its peak price from November 2021, trading at a forward price-to-earnings ratio of just 17.8. This is cheap for a growth-oriented, profitable company like Etsy with competitive advantages. In contrast, the S&P 500 trades at a forward earnings multiple of 20.4.
Another aspect that makes this stock a solid investment is the network effect.
Etsy’s 97.3 million active buyers and 8.8 million active sellers create a favorable situation where the bigger the platform grows, the more valuable it becomes.
The company’s scale also discourages new entrants from building a rival marketplace from the ground up. Attracting buyers and sellers to a marketplace where sufficient volume already exists would take a lot of work.
This protects Etsy’s competitive advantage.
Sure, there’s the bearish case that the firm saw a modest decline in platform spending per active buyer, down to about $127 on a trailing 12-month basis.
Hence, the concern is that Etsy could struggle to grow its base of active customers and how frequently they spend.
Valid concerns, yes. However, during periods of economic pressure driven by high inflation and interest rate hikes (like we’ve seen over the last two years)…
Consumers typically remain active but make fewer or cheaper purchases.
But now, with inflation on the decline, spending patterns among new buyers have been encouraging. Etsy saw a 20% surge in household spending in the top 10% of income earners. This suggests that as pressures ease and the median consumer feels better, the company will likely see a solid return to growth.
To be clear, I don’t recommend pouring your life savings into Etsy shares.
But I believe this is a fantastic buying opportunity, and even better, there’s a unique way to play the stock that doesn’t require taking unnecessary risks.
Click here to see our approach to opportunities like this.
Wishing you a blessed and profitable day,