Etsy (NASDAQ:ETSY), an online marketplace that once thrived during the pandemic, has faced a decline in its stock value due to changing demand dynamics and a decrease in active buyers. Its performance over the past year has trailed behind the S&P 500 Index and hasn’t benefited from the tech stock recovery seen this year. The current year-to-date dip of around 38% and a 74% drop from its peak two years ago raise questions about whether Etsy’s stock is now an attractive investment opportunity or if there’s more downside risk. Let’s delve into this matter more closely.
Understanding Etsy’s Business Model
Etsy operates a prominent online marketplace catering to handcrafted and artisanal products. Its primary platform, Etsy.com, is a global hub for unique goods crafted and sold by independent sellers. By facilitating connections between buyers and sellers and providing related services, Etsy generates revenue through transaction, listing, and payment processing fees. Additional income comes from optional seller services like advertising and shipping labels. Notably, in 2022, approximately 74.5% of Etsy’s total revenues stemmed from marketplace activities.
Factors Favoring Etsy’s Upside Potential
Etsy boasts a vast assortment of items, including customized, vintage, and craft products from around the world. A substantial part of its gross merchandise sales (GMS) comes from personalized and made-to-order items, setting it apart from competitors. This distinctiveness enables Etsy to increase organic traffic, cultivate customer loyalty, and enhance profitability. The company’s geographical diversification is also noteworthy, with around 45% of its GMS originating from international markets.
Another positive factor is the stabilization of Etsy’s GMS per active buyer. The surge in GMS and active buyers triggered by the COVID-19 pandemic contributed to this metric. Although the broader economic reopening and uncertainties impacted buyer and GMS numbers, Etsy’s second-quarter results showed an upward trend. CEO Josh Silverman mentioned that key metrics are showing positive trends again, and efforts to reactivate lapsed buyers and attract new ones are ongoing.
Etsy Stock: Proceeding with Caution
Despite its efforts to drive buyer engagement and GMS, macroeconomic conditions continue to influence consumer spending habits. These conditions could potentially hamper GMS and revenue growth rates. The company signaled that the macroeconomic climate remains challenging, particularly for sellers seeking a foothold.
Considering External Factors
While Etsy focuses on internal improvements, external factors like macroeconomic challenges and changes in student loan payment status could influence consumer discretionary spending. These elements could impact Etsy’s average order value and growth trajectory.
Striking a Balance
Etsy’s GMS per active buyer for the past 12 months saw a 6% year-over-year decline to $128 in Q2, although it remained above pre-pandemic levels and exhibited signs of stabilization. Etsy’s unique offerings, retention strategies, and efforts to reactivate past buyers bode well for future growth. However, external challenges, especially macroeconomic uncertainties and consumer spending patterns, remain potential hurdles.
Analyst Insights
Despite the current economic landscape, analysts covering Etsy remain optimistic. Among the 24 analysts, 11 suggest a “Strong Buy,” two recommend a “Moderate Buy,” nine maintain a “Hold,” one advocates a “Strong Sell,” and another proposes a “Moderate Sell.” Following the recent stock price correction, the average price target of $113.96 indicates a potential upside of about 53% from the current levels.
Featured Image: Megapixl @ Selagin
Author Faith Yakubu