Etsy (NASDAQ: ETSY), like many other companies that have been fueled by the pandemic, faces tough year-over-year comparisons amid slowing growth as economies reopen. Add to that rising interest rates and other macroeconomic headwinds, and investors have gone downright sour on high-growth tech companies. Obviously, growth above 100% can’t last forever, but that doesn’t mean it’s time to ditch these businesses altogether.
With Etsy’s stock down 64% in 2022, now is a fantastic time to pick up some stocks. Let’s take a closer look.
Etsy operates a differentiated marketplace
While Etsy was showing fantastic growth ahead of 2020, the pandemic has completely supercharged its outlook. More and more consumers are turning to online marketplace as physical shopping faced major restrictions, with shoppers seeking not just face masks but other items like bread machines as they took advantage of increased leisure time. Etsy’s flexibility was on point, driving revenue up more than 125% in four consecutive quarters starting in Q2 2020.
But in the first quarter of 2022, sales were up just 5% year-over-year. And that’s part of the reason the stock sold off. However, it’s no surprise that with pandemic restrictions easing and consumer mobility resuming, Etsy would face some near-term headwinds.
What investors need to do is take a step back and focus on the underlying fundamentals of Etsy’s business. For starters, the company continues to add more users with each passing quarter. As of March 31, there were 95.1 million active buyers and 7.7 million active sellers on the platform, up 4.9% and 62.8%, respectively, from the reporting period. last year. And gross merchandise sales (GMS), which is the total value of transactions on the site during a given period, reached $3.3 billion in the quarter, up 3.5%.
A critical component of any investment thesis is the value a company delivers to its customers. And with Etsy, the value proposition is surprisingly clear. The company offers buyers handcrafted and unique items. A 2020 business survey indicated that 88% of shoppers said Etsy sold goods they couldn’t find anywhere else.
Additionally, from a sellers perspective, Etsy makes not only starting but also running an online business seamless and extremely easy. Additional services like search discovery, ads, payments, and shipping are invaluable, especially for those looking to get into side businesses and small businesses.
Etsy’s financial situation is better than that of most other companies. In 2021, the company recorded a Gross margin of 71.9% and an operating margin of 20.0%, both up sharply from just a few years ago. Because Etsy does not manufacture products itself, own any inventory, or invest in fulfillment centers, its current operating model requires minimal capital expenditure. That’s why free cash flow was $623 million in 2021 (excluding acquisitions).
The market opportunity for Etsy is absolutely huge. Management repeatedly stresses that across the company’s seven core geographies, which include the US, UK, Canada, Germany, Australia, France and India, GMS potential in relevant online retail categories is approximately $466 billion. Based on 2021 figures, Etsy’s market share is just 2.6%. There’s still a ton of growth potential as we look to the decade ahead, and that means increased sales, earnings and cash flow, translating into higher stock prices.
Etsy’s valuation looks attractive
Despite the unsurprising slowdown in growth from peaks reached during the pandemic, Etsy’s fundamentals remain strong. And that is what investors should demand above all else before making an investment decision. The next piece involves a look at business valuation.
Etsy price/earnings ratio The ratio (P/E) is 26.5. With the stock’s recent drop, that valuation is much lower than it was a year ago, and almost the cheapest in the past five years. It’s safe to say that investors have written off much of this company’s outlook..
But as an outstanding company that has seen tremendous historic growth, boasts superb financials thanks to its small-cap operating model, and still has a long streak of expansion ahead of it, Etsy today looks like a solid addition. to investors’ portfolios.
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