Why Etsy Could Be a Breakout Stock This Year

E– Commerce, by design, involves a customer purchasing goods over the Internet. This path often results in virtually no human interaction unless something goes wrong. An e-commerce company whose mission is to “keep commerce human” contrasts with websites typically used to purchase goods online.

Etsy (NASDAQ: ETSY) is an online marketplace where individuals and businesses can open a digital store to sell customizable, handmade products. COVID-19 boosted the company’s sales massively, as it became the go-to place to shop for face masks early in the pandemic. The company has attracted millions of new buyers over the past two years, but the stock is down more than 60% from its all-time high as the market revalues ​​stocks boosted by the pandemic. Maybe it’s time to add or start a position in Etsy’s stock?

Image source: Getty Images.

A solid financial base

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

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

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

Looking ahead to 2022, Etsy expects midterm first-quarter revenue of $578 million, up just 5% year-over-year. With such a sharp deceleration in growth, Etsy is looking for ways to increase sales.

And after?

The general sentiment for Etsy stock is, “What happens next?” The biggest sale and increase in customer base it will likely experience has already taken place, and investors are wondering if there is much room for the business to grow. While this is a logical thought process, Etsy is far from done.

Effective April 11, Etsy’s marketplace transaction fees have increased from 5% to 6.5%. This 30% increase in fees should generate more revenue and profit for the business, although Etsy has pledged to spend the additional revenue on marketing and other sales tools.

A person shipping a package.

Image source: Getty Images.

Not everyone agrees with this change. Some sellers are on strike as of this writing by putting their stores 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 else challenges like this could become more common.

Etsy is also expanding to different geographies like the UK and Germany. In the fourth quarter, 44% of supermarkets came from non-US areas, which shows that the brand has a global presence. Sellers creating inventory for buyers, country culture and demand drive product development, not Etsy. This colossal advantage will help the company to excel in its international expansion.

Is Etsy stock a purchase?

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

Chart of ETSY Price to Free Cash Flow

Data by YCharts.

This relatively low valuation should give investors reassurance that they are not buying the stock at inflated prices.

Investors should also keep an eye on Etsy when it releases its earnings around the start of May. There’s not much confidence in the stock, so any beat in revenue or earnings can send it skyrocketing. In particular, I will monitor its supermarkets and active buyers. These two metrics will tell the story of customer loyalty to Etsy.

Its stock is a buy here, but I can understand if potential investors want to wait for Q1 results to be released to make sure the company is still heading in the right direction. I have confidence in Etsy’s business model and believe it is a strong candidate for a title with significant upside potential in 2022.

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Keithen Drury owns Etsy. The Motley Fool owns and recommends Etsy. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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