Key Points
The days of monster user and spending growth for this business are over, and the market isn’t happy about it.
Investors can’t forget that this online marketplace possesses a network effect, which supports its competitive position.
Valuation expansion and higher revenue can be the one-two punch driving shares higher.
Buying stocks while they continue to post strong returns and trade near record highs might not be the strategy that certain investors want to pursue. Instead, their attention could be on businesses whose share prices have gotten crushed, in the hopes that a successful turnaround could lead to impressive portfolio gains.
There's an e-commerce company that received a boost during the pandemic. And its shares had soared. But the market became extremely concerned when growth started to slow. As of Oct. 14, shares trade 76% below their peak.
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Can this beaten-down stock double in five years and turn a $10,000 investment into $20,000 by 2030?
Things haven't been the same since the pandemic
Etsy (NASDAQ: ETSY) has been on a roller coaster in the past several years. The pandemic pressured in-person retail, lifting online shopping in the process. Etsy gained. Its revenue increased by 111% in 2020 and 35% in 2021. This was the direct result of its user base expanding rapidly and gross merchandise sales (GMS) taking off.
The market always loves a good growth story. And Etsy was exactly that. But the investment community's overly optimistic view can deflate faster than it started.
Etsy's GMS totaled $2.8 billion in the second quarter (ended June 30). That figure was 8% below the same period of 2021. So, while the overall economic backdrop has been healthy for the most part, Etsy has failed to grow. This is probably the main reason that the stock has gotten hammered.
It's straightforward how the company performs. When the economy is thriving and consumers are willing to spend more freely, Etsy does well because it sells discretionary goods. On the other hand, periods of weaker consumer spending can hurt the financials. The online marketplace has proven to be very cyclical, which is obviously an adverse trait.
Etsy has found its place in the e-commerce market
Despite the ongoing challenges facing Etsy, this is still a solid business. It has captured a successful sliver in the massive e-commerce industry, with its focus on differentiated merchandise helping it stand out against the likes of mass-market rivals like Amazon or Walmart. Etsy has 93.3 million active buyers and 8.1 million active sellers, both much greater than before the pandemic in 2019. And it has established a global presence.
What stands out is Etsy's network effect. The two-sided marketplace's scale would be extremely difficult for a disruptor to try and replicate. A newcomer would first need to sign up merchants who are willing to set up their stores on the site. But this can be challenging without any customers. Additionally, the opposite would also be an uphill battle, as signing up buyers without any sellers seems like an impossible task.
From a competitive standpoint, Etsy looks to be in good shape. Its brand is likely the first to come to mind of shoppers looking for specialized and customizable merchandise.
The stock could rise because of revenue growth and valuation expansion
It's certainly a possibility that Etsy's shares double in the next five years, turning $10,000 into $20,000 during that time. The positive view is that the broader economy spends much more time in expansion mode than when it's in a softer period. This works to Etsy's favor, as over longer periods of time, the marketplace should see higher GMS and more users, which can drive greater revenue.
The current valuation also sets expectations extremely low. The stock trades at a price-to-sales (P/S) ratio of just 3.1, much cheaper than the historical average. Valuation expansion can definitely play a part, potentially contributing to the stock's rise in the years ahead.
However, while a 100% gain is possible, there isn't necessarily a high probability that it will happen. The excuse that Etsy is dealing with a post-pandemic hangover is no longer valid, as the calendar is about to turn to 2026, and growth is still a concern.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Etsy, and Walmart. The Motley Fool has a disclosure policy.
