Is Etsy a Good Buy? Examining Its Future After Price Decline
The COVID-19 pandemic led to a surge in demand for stay-at-home activities, and online craft marketplace Etsy (NASDAQ: ETSY) capitalized on this trend. With its stock price rising, many investors expected its success to last indefinitely.
However, the company’s market value has steeply declined — presenting an opportunity for budget-conscious investors. Let’s explore the potential for this battered stock to bounce back over the next five years.
Have Times Changed for Etsy?
Founded in 2005 and public since 2015, Etsy is a well-known e-commerce platform focused on handmade, vintage, and craft items. The pandemic saw a boom for Etsy as many turned to online shopping and self-employment.
Despite its pandemic success, Etsy struggled to maintain its growth. The company’s expansion slowed, and its shares fell sharply due to macroeconomic shifts. Rising inflation led consumers to hold back on non-essential spending.
Additionally, increasing competition threatens Etsy. Chinese competitors like Shein and Temu (a part of Pinduoduo Holdings) offer apparel at prices that challenge Etsy’s unique products. Moreover, Amazon has expanded into Etsy’s territory with its Amazon Handmade store.
Stability Amidst Falling Margins
Etsy’s shares have plummeted 84% from their peak of $297 in late 2021. While this steep drop raises concern, it does not necessarily indicate that the business is failing. Recent earnings suggest stable operations.
In Q2, Etsy’s revenue grew by 3% year over year, reaching $647.8 million. For context, during its stock peak in Q2 2021, it reported revenue of $528.9 million, illustrating continued top-line growth. However, gross margins remained steady at 72%, while operating margins fell from 17% to 11%.
Gross margins represent earnings after subtracting direct sales costs, whereas operating margins account for all expenses, including salaries, advertising, and product development. These operational costs appear to be the primary factor behind Etsy’s declining margins.
Image source: Getty Images.
Looking Ahead: Five-Year Prospects
Immature, growth-oriented companies frequently invest heavily in operational costs to capture market share. Etsy’s leaders seem to cling to this strategy despite the company’s maturity. In the next five years, they will need to prioritize cost-cutting and operational efficiency.
In late 2023, Etsy laid off approximately 11% of its workforce. However, this may not suffice, given its slow growth outlook.
Many internet companies have successfully trimmed costs since the pandemic. For instance, Amazon and Meta Platforms have laid off tens of thousands of employees from 2021 to 2024, resulting in higher operating income and stock prices. With its low valuation, Etsy has the potential for a similar recovery.
Currently, Etsy trades at a forward price-to-earnings (P/E) ratio of 13, considerably below the S&P 500 average of 24. This presents an attractive investment opportunity, considering the company’s steady business and room for margin growth through efficiency improvements. Value-oriented investors may find shares appealing and potentially outperform the market in the coming years.
Should You Invest $1,000 in Etsy Now?
Before making an investment in Etsy, keep this in mind:
The Motley Fool Stock Advisor team recently named their top 10 stocks for purchase, and Etsy did not make the list. The selected stocks have strong potential for significant gains in the years ahead.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook, sister to Meta Platforms’ CEO Mark Zuckerberg, is also on The Motley Fool’s board. Will Ebiefung has no positions in any of the mentioned stocks. The Motley Fool holds positions in and recommends Amazon, Etsy, and Meta Platforms. The Motley Fool has a disclosure policy.
The views and opinions expressed herein belong to the author and do not necessarily reflect those of Nasdaq, Inc.
