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3 facts about Etsy you need to know before buying stock

This struggling e-commerce market still has some attractive features.

Investors were not very happy Etsy (ETSY 0.18%) In recent years. After shares of the online unique goods and crafts market grew 380% in the five years to the November 2021 peak, it has fallen sharply, now down 79%.

Just an e-commerce business announced results for the first quarter of 2024 disappointed investors, causing even greater declines in share prices. With a forward price-to-earnings ratio of 13.5, the stock may be too hard to ignore at this point.

Here are three things to know about Etsy Shares.

Platform business model

Etsy is not your typical retailer. It does not purchase or store inventory, and does not invest in warehouses or order fulfillment centers. Instead, it is a technology platform that connects buyers and sellers around the world. Etsy facilitates transactions by providing an online store, payments, advertising, and shipping services, all while collecting revenue.

What’s attractive about this business model is that it brings benefits network effects. As more buyers and sellers join the platform, Etsy’s services immediately become more valuable to all parties involved. This means that for a novice, creating a competitive market from scratch would be an extremely difficult task.

This economic moat protects Etsy’s competitiveness. And that’s an important feature that investors should look for.

Dealing with macro problems

Etsy saw huge demand during the height of the pandemic, when people were especially interested in buying face masks. This monster’s growth came to a screeching halt.

In the first three months of this year, Etsy reported gross merchandise sales (GMS) of just under $3 billion, down 3.7% year-over-year. This number has remained relatively stable since Q1 2021.

The Management Board once again criticized the uncertain macroeconomic environment. Higher interest rates and persistent inflationary pressures are not driving more consumer spending discretionary items. As Etsy’s most important product categories such as home furnishings, jewelry, and clothing may be suspended during difficult times, Etsy’s business is severely impacted.

Encouragingly, Etsy has increased its base of active buyers and active sellers by 0.9% and 15%, respectively, compared to 12 months ago. Perhaps this is a leading indicator that as the economy strengthens, spending will slow down.

Great opportunity for development

It’s easy to get caught up in Etsy’s latest challenges. However, investors looking to buy shares should focus on the bigger picture. It’s clear that Etsy still has a lot of room for growth.

According to the management team, the total addressable market (GMS’s online retail capabilities, key product categories and seven core geographies) is estimated at $466 billion. In 2023, Etsy handled approximately $12 billion in GMS transactions, giving it just a 2.5% slice of this massive business opportunity. Of course, it’s safe to assume that the company won’t come close to taking over the entire market, but you can get an idea of ​​the company’s potential upside.

It also helps that Etsy is benefiting from several key enablers. To start with, online shopping still only accounts for a small part of total retail. As consumers continue to prefer this more convenient spending method, it creates favorable conditions for Etsy to grow GMS and revenue.

These two other tailwinds are more anecdotal. On the one hand, consumers may be more interested in supporting small businesses, a group that Etsy serves. Additionally, the growth of side hustles and entrepreneurship to increase income naturally attracts more people looking to sell things online and set up shops on Etsy.

Understanding the business model, its recent financial performance and growth prospects should provide investors with basic information before making a decision on Etsy stock.

Neil Patel and his clients have no position in any of the companies mentioned. The Motley Fool has posts on Etsy and recommends them. The Motley Fool has a disclosure policy.