Etsy: A Discounted Growth Stock Worth Buying

Etsy (ETSY), the online marketplace for handmade and custom goods, has seen a decline in sales and a contraction in profits. Despite these challenges, the company's stock presents an attractive buying opportunity at its current state.

Investors who purchased Etsy's shares at their peak around two and a half years ago might be disappointed, facing an approximate 78% decrease in their investment's value. However, the long-term prospects for Etsy remain promising due to its robust business model that generates significant cash flow—a key factor that could lead to rewarding shareholders over time.

The Strength of Etsy's Business Model

Etsy's Gross Merchandise Sales (GMS) is a vital indicator of the platform's activity, reflecting the total value of goods sold. While its 2021 GMS figure was a high of $13.5 billion, subsequent years have seen slight declines, with 2024's first-quarter expectations also projecting a minor decrease. Nevertheless, Etsy's situation is not as dire as it might appear for a traditional retailer since it operates as a facilitator of third-party sales, which demands a focus on different performance metrics.

The size of Etsy's user base is essential for its success, and the platform continues to attract both buyers and sellers. Notably, the number of active buyers reached a new high of 92 million in the last quarter, and the growth in active sellers bodes well for expanded product offerings. Despite the modest retreat in GMS, Etsy has managed to increase its revenue by 7% in 2023 through alternative avenues, such as advertising revenue.

Etsy's marketplace model provides the flexibility to generate income even when sales plateau, through various monetization strategies. The company also benefits from a high-margin business structure, boasting a 70% gross profit margin and an 11% net profit margin in 2023—a testament to the effectiveness of its operational modus operandi.

Future Growth Opportunities for Etsy

Etsy is exploring the use of Artificial Intelligence (AI) to enhance sales by improving search results, making the immense array of listings more accessible to buyers. The company is also focusing on gifting as a means to drive platform traffic, with AI playing a role in helping shoppers find the perfect gifts. These initiatives suggest that additional revenue growth could be on the horizon.

In the meantime, Etsy's considerable free cash flow, amounting to $666 million in 2023, allows for substantial shareholder value distribution. With a $7.9 billion market capitalization and a free cash flow multiple of 12, the stock is considered inexpensive. Etsy's strategy to repurchase shares has already reduced the share count by 4%, with plans to continue buybacks to further enhance shareholder value.

The future for Etsy investors looks favorable, with two potential outcomes: Either the market will recognize Etsy's undervaluation and adjust the price upwards, or the share price will remain low, providing the company more chances to decrease the share count and enrich shareholder value. In light of these dynamics, the probability of Etsy outperforming the market could increase as time progresses.

Etsy, Investment, Shareholder