Insights

Is Etsy Stock a Buy?

Etsy (NASDAQ: ETSY) was a popular destination for shoppers at the onset of the pandemic. The company boasts millions of creative sellers who capitalized on the government’s mandate to wear masks in public places. Sellers created unique ones that were a new way for consumers to express themselves during trying times. 

Plus, many buyers who bought masks also bought other products. Riding on this recent success, is Etsy stock a good buy for investors?

Etsy is propelling the flywheel forward

To better grasp the magnitude of Etsy’s popularity at the pandemic’s onset, you can look at its revenue, which exploded by 111% in 2020 to $1.7 billion. In the five years prior, Etsy’s revenue growth had not exceeded 40% in any one year. In 2021, Etsy built on its success to grow sales another 35% to reach $2.3 billion. Notably, the company owns no inventory listed for sale on the platform. Etsy brings together buyers and sellers and takes a percentage of each transaction.

ETSY Revenue (Quarterly) data by YCharts

Etsy has recently gained excellent traction on both sides of that equation. From the first quarter of 2020 to the first quarter of 2022, Etsy signed on 2.9 million sellers, taking its total from 2.6 million to 5.5 million. Etsy increased buyers from 47.1 million to 89.1 million in that same time. You can’t have one without the other. Sellers attract buyers by listing new, custom-made items. Buyers entice sellers to create more often because of the lure of higher sales. For shareholders, it’s an encouraging sign to see Etsy’s virtuous cycle moving forward.

Folks are spending a lot more on Etsy, too. Gross merchandise sales, which measure the dollar value of all transactions on Etsy’s platform, have increased by 218% over the previous three years. That said, growth in this metric has decelerated considerably since the economic reopening started gaining momentum in the second quarter of 2021. However, that was to be expected. It would be unreasonable to expect the growth rates to continue now that shoppers have more options for where to spend their money. 

Etsy’s stock is a buy right now

ETSY Price to Free Cash Flow data by YCharts

However, it appears that investors are pessimistic about Etsy’s prospects. The stock trades at a price-to-earnings ratio of 32 and a price-to-free-cash-flow ratio of 27. That means investors can buy Etsy at arguably its cheapest valuation in the last five years. Admittedly, its growth will slow in the near term due to economic reopening. Still, Etsy will retain millions of the buyers and sellers it gained during the pandemic, even if many divert some of their energy elsewhere. 

With an asset-light business model, considerable progress on its flywheel with buyers and sellers, and a favorable valuation, Etsy’s stock is a buy. 

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Etsy. The Motley Fool has a disclosure policy.

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