Why Etsy Could Be a Breakout Stock This Year

Even amid a seller strike, this company has solid prospects.

Even amid a seller strike, this company has solid prospects.

E-commerce, by design, involves a customer purchasing goods over the internet. This avenue often results in hardly any human interaction, unless something goes wrong. One e-commerce company whose mission is “to keep commerce human” contrasts with websites typically used to purchase goods online.

Etsy ( ETSY -1.43% ) is an online marketplace where individuals and businesses can open a digital store to sell customizable, handmade goods. COVID-19 drove a massive sales boost for the company as it became the go-to place to purchase face masks in the early stages of the pandemic. The business captured millions of new shoppers over the past two years, but the stock is down over 60% from its all-time high as the market reevaluates pandemic-boosted stocks. Could now be the right time to add or start a position in Etsy stock?

Person opening a package and smiling while looking at item.

Image source: Getty Images.

Solid financial footing

The biggest question Etsy investors must ask is: Has it maintained the customers it acquired during the pandemic? One of the most relevant metrics Etsy tracks is its “habitual buyers” designation. These are customers who spend a total of at least $200 over six separate or more spending days across a rolling 12-month period. At the end of 2019, Etsy had 2.5 million habitual buyers, but that number shot up to 6.5 million in 2020 and 8.1 million in 2021. All eyes will be on this number with each new earnings report over the coming year — expect the stock to get hammered if it slips.

Etsy also has to worry about product stagnation. If buyers come and only find the same items as their previous search, they could quickly grow bored with the platform. Fortunately, Etsy saw a solid 21.4% uptick in active sellers from 2020 to 2021. New sellers bring new products and ideas, giving customers a fresh selection to choose from. Etsy’s acquisition of Depop and Elo7 also added another 2.2 million sellers, giving the company more exposure to different corners of the market in Brazil (Elo7) and fashion resale (Depop).

Overall, 2021 was a solid year for Etsy. Gross merchandise sales (GMS) rose 31.2% to $13.5 billion, and revenue was up 35.0% to $2.3 billion. It is a profitable business, generating $494 million in net income for the year, resulting in a solid 21% net margin.

Looking forward to 2022, Etsy expects first-quarter revenue of $578 million at the midpoint, up just 5% year over year. With such a stark deceleration in its growth, Etsy is looking for ways to increase sales.

What’s next?

The general sentiment for Etsy stock is: “What’s next?” The largest sale and customer surge it likely will ever experience has already occurred, and investors are wondering if there is much room for the company to grow. While this is a logical thought process, Etsy is far from done.

Starting April 11, Etsy’s marketplace transaction fee went up from 5% to 6.5%. This 30% increase in fees is expected to generate more revenue and profit for the company, although Etsy did pledge to spend the extra revenue on marketing and other seller tools.

Person shipping a package.

Image source: Getty Images.

Not everyone is on board with this change. Some sellers are striking as of this writing by putting their shops on vacation mode from April 11 to April 18. The strike could potentially delay customer orders and result in lost sales. Etsy will need to mend its relationship with sellers, or challenges like this may become more common.

Etsy is also expanding to different geographic locations like the United Kingdom and Germany. In the fourth quarter, 44% of GMS came from non-U.S. areas, showing the brand has a global presence. With sellers creating the inventory for buyers, the country’s culture and demand drive product development, not Etsy. This colossal advantage will help the company excel as it expands internationally.

Is Etsy stock a buy?

Etsy’s valuation is near a multiyear low when assessed from a free cash flow perspective.

ETSY Price to Free Cash Flow Chart

Data by YCharts.

This relatively low valuation should give investors confidence they aren’t purchasing the stock at inflated prices.

Investors should also keep their eyes on Etsy when it reports earnings sometime around the beginning of May. There isn’t a lot of confidence in the stock, so any revenue or earnings beat may send it spiking. In particular, I’ll be watching its GMS and active buyers. These two metrics will tell the story behind how much customers are sticking with Etsy.

Its stock is a buy here, but I can understand if potential investors want to wait until first-quarter earnings are reported to ensure the business is still heading in the right direction. I am confident in Etsy’s business model and think it makes an excellent candidate for a stock with significant 2022 recovery potential.

Read this article on Motley Fool

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