Things are going from bad to worse for the e-commerce specialist Etsy (ETSY 2.81%). The company has faced significant headwinds in the past three years, and its recent fourth-quarter earnings results just gave the bears even more ammunition. Etsy’s shares fell on the heels of a disappointing quarterly update. Is there any hope that Etsy can turn things around? If it can, now might be a great time to initiate a position in the stock, considering Etsy is barely above its 52-week low. Is this an opportunity investors should pounce on?
Why Etsy continues to struggle
Etsy’s e-commerce platform is known for its large database of vintage and handmade goods. On the one hand, the company’s focus on this niche has been a hit. Sellers of such products know where to find buyers and vice-versa. On the other hand, these goods are typically expensive. Recent economic issues, including inflation, have affected consumers’ buying patterns. The products on Etsy tend to be near the top of the list of things to cut back on when people are crunched for cash. So, Etsy’s business hasn’t been as successful in the past few years as its financial results have reflected. The company’s quarterly revenue growth has dropped significantly despite increasing its seller transaction fee by 30% in 2022.
ETSY Operating Revenue (Quarterly YoY Growth) data by YCharts
In 2024, Etsy’s gross merchandise volume declined by 4.4% year over year to $12.6 billion. The company’s revenue grew by just 2.2% year over year to $2.8 billion. Its net income declined to $303.3 million, down 1.4% compared to the previous fiscal year. To make matters worse, Etsy’s active buyers and active sellers declined by 1.1% and 10% year over year, respectively, as of the end of 2024. It’s no wonder investors aren’t impressed with the e-commerce specialist right now.
Don’t expect a quick turnaround
Here’s what investors have learned about Etsy since 2020: The company’s performance is highly susceptible to economic fluctuations. Etsy performed well in the early pandemic, since, even as economic activity declined, people spent more time (and money) online. They had no choice: Government-imposed lockdowns obliged them to. However, Etsy’s performance slowed down considerably once economic troubles hit.
Once things recover, investors can expect Etsy to bounce back as well, which makes it a pretty attractive stock to buy while it is still struggling. It’s best to initiate a position in the company before its fortunes reverse and it starts performing well, especially considering several factors. Here are three of them. First, as I hinted at earlier, Etsy benefits from the network effect, with the value of its platform increasing with use.
While it might have lost buyers and sellers in recent years, Etsy remains one of the leaders in its niche of the highly competitive e-commerce space and has managed to be somewhat successful despite competition from giants such as Amazon. Thanks to its network effect, Etsy’s ecosystem will generally strengthen over the long run, even if it sometimes goes through challenging periods. Second, Etsy still has significant growth opportunities. That’s not surprising.
Despite significant progress in the past decade, the e-commerce market is still in high-growth mode. Analysts predict it will continue to expand rapidly in the coming years. Etsy estimates a total addressable market of $500 billion for online commerce, of which it has captured a tiny 2% market share. Etsy isn’t the only game in town, but the company can command a reasonable slice of this growing pie — especially in its favored niche — in the long run. Finally, Etsy looks attractive by traditional valuation metrics.
ETSY PE Ratio (Forward) data by YCharts
Etsy’s forward price-to-earnings ratio of 9 is less than half the consumer discretionary average of 24.3. The company’s forward price-to-sales ratio is also well within the attractively valued range of 2 and below. Etsy might not bounce back overnight. In fact, I expect it to take sometime, especially with recession fears mounting. However, Etsy could deliver excellent returns for investors willing to ride out the storm for a while — think five years and beyond.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Prosper Junior Bakiny has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Etsy. The Motley Fool has a disclosure policy.
