Etsy (ETSY) investors had a rough 2022. The stock underperformed a weak market on fears of a slowdown in short-term growth, as consumers shifted spending from e-commerce channels. Wall Street was also concerned that Etsy might not be able to quickly pivot to profitability.
But smart investors can look beyond those short-term concerns as they judge the big-picture opportunities for the e-commerce platform. With this approach in mind, let’s look at a few factors that suggest this growth spurt has a bright future.
1. Growth stops
The headline for many investors in 2022 was that Etsy is done growing. The value of sales on its platform fell 3% in the last quarter, which ended at the end of September.
Look a little closer, though, and you’ll see that Etsy works well in a difficult selling environment. Peer eBay (EBAY) reported a volume decrease of 11% for the same period. Remove the impact of currency exchange rates, and Etsy grew sales 1% compared to eBay’s 5% drop.
The company is also doing a better job keeping most of the new buyers who found their platform during the pandemic. The group of buyers decreased by only 2% in the third quarter. And eBay’s comparable sales figure was down 11%. “We believe our sustained performance is a testament to Etsy’s unique position in e-commerce,” CEO Josh Silverman said in early November.
2. Pricing power is there
Etsy isn’t impressing anyone with its bottom line financial results right now. Its net loss in the first three quarters of 2022 was a brutal $803 million. This figure is greatly influenced by a one-time weakening charge, however.
Looking at continuing operations shows a stronger business that could have solid pricing power. Gross profit rose 11% in the last quarter even though sales volumes were flat. That momentum was supported by increased dealer fees, which landed at 20% of sales in the third quarter; eBay’s comparable figure is 13%.
The platform has a chance to be very profitable if it can maintain such a high take-up rate, and the key to raising that figure is for the company to provide more services to sellers even as its pool of buyers grows. Management is currently reinvesting most of that extra cash into the platform with an eye to achieving that result.
3. A proven business model
Etsy’s intermediary selling approach has several attractive features that support positive shareholder returns. The company does not assume inventory risks as a seller. Their fees also provide strong cash flow, which may begin to flow more toward shareholders once the company slows its pace of growth investments.
“We love our business model,” said Chief Financial Officer Rachel Glaser, pointing to Etsy’s strong adjusted profit margin.
Investors have the chance to own that attractive business model at a discounted price today. The stock trades for about 7 times annual sales while the price-to-sales ratio was nearly 12 just a year ago.
Sure, eBay stock is much cheaper at 2.5 times sales. And the broader e-commerce industry could see more disruption in 2023 if a recession depresses consumer spending.
But smart investors know that cyclical recessions like this are a fixture in the industry that don’t threaten the long-term bullish thesis. Etsy takes risks, like any business. But it has a good shot at producing much higher earnings and cash flow over time.