3 Things You Need to Know About Etsy Before Buying Stock

Investors looking to gain exposure to the e-commerce industry are most likely to Amazon at the top of their lists. The massive tech behemoth, worth more than $1.7 trillion, dominates online shopping.

However, Etsy (ETSY 1.36%)a much smaller company in comparison, could also catch your eye. It has managed to carve out a niche in the large e-commerce space. If you are thinking of buying the stock, first know these three things.

1. Hard times

As consumers spent more money and time online than ever before, Etsy was firing on all cylinders during the COVID-19 pandemic. But things have slowed down considerably since then, and the company has hit a rough patch.

In the second quarter (ended June 30), Etsy’s primary marketplace saw gross merchandise sales (GMS) decline 3.2% compared to the same period a year earlier. This was the third consecutive quarter of decline, and management expects more pressure in Q3.

Etsy’s top product categories are things like home furnishings, jewelry, and clothing. These can be described as non-essential discretionary purchases. When there are inflationary pressures combined with general economic uncertainty, it makes sense that consumers would be a little more cautious with their spending.

It’s not all bad news, though. Consumer Price Index is falling to more normal levels. And there is a possibility that the Federal Reserve will start cutting interest rates in September. That could help provide much-needed support for GMS Etsy’s growth.

2. Network effects

Etsy has economic moat. This term, made famous by the great Warren Buffett, indicates that a company has some kind of sustainable competitive advantage that helps protect it from threats from existing industry rivals and new entrants. This is an important characteristic that defines a high-quality company and increases its durability.

The presence of the mighty network effects supports Etsy’s moat. Etsy operates a two-sided online marketplace. As of June 30, it had 96.6 million active buyers and 8.8 million active sellers. As more buyers join, the pool of potential customers grows, and Etsy becomes more valuable to sellers. And as more sellers join, buyers have a wider range of choices. As a result, the platform becomes better for all stakeholders over time.

Imagine what it would take to start a competitive online marketplace from scratch. Not only would you have to attract buyers without having any products to sell, but you would also have to sign sellers without having any buyers. This gives me confidence that Etsy probably won’t be disrupted anytime soon.

3. Cheap stocks

Etsy was once a Wall Street darling, with the stock up 2,160% in the five years leading up to its peak. Then, a combination of slower growth from the pandemic and market aversion to fast-moving tech stocks hurt Etsy shareholders.

The stock is currently trading 81% below its all-time high. And while Nasdaq Composite ANDindex Since the beginning of 2023, Etsy shares are up 59%, while the stock is down 54% (as of August 7).

But there is an opportunity here for patient investors. In price to earnings ratio for the future 12.3, Etsy is trading at a very low valuation. This shows the market’s extreme pessimism towards this business.

If you think Etsy will once again see solid revenue and profit growth, now could be a good time to buy shares.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no ownership stakes in any of the stocks mentioned. The Motley Fool owns and recommends shares of Amazon and Etsy. The Motley Fool has a disclosure policy.