Since early April, the market has started to recoup its 2025 losses. But even though it’s still below its record high, investors might struggle to find attractive buying opportunities. Luckily, there’s one company that’s on the discount rack.
As of this writing, this e-commerce stock trades a gut-wrenching 84% below the peak it touched in November 2021. Should investors scoop up these shares like there’s no tomorrow?
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Focus on the positives
For the first quarter, Etsy (ETSY -0.32%) exceeded Wall Street’s estimates on the top line. The specialty online marketplace, where third-party sellers list vintage, unique, and handcrafted goods, posted revenue of $651.2 million, a 0.8% year-over-year increase. That might have taken attention away from the fact that its adjusted earnings per share missed analysts’ estimates.
There are other favorable attributes that might make Etsy a worthy investment candidate. For starters, the platform is differentiated in the merchandise that it offers. A survey conducted by the business in 2023 revealed that 83% of buyers on the site say it has items that they can’t find anywhere else. This helps Etsy stand out in a crowded retail field.
Etsy also benefits from the network effect. As more third-party sellers post their goods for sale, Etsy becomes more valuable to shoppers looking for a broad selection. And as more buyers flock to the site, sellers can target a larger potential customer base.
The uncertainty around President Donald Trump’s tariffs is worrying investors and executive teams at companies of all stripes. But on Etsy’s Q4 earnings call in February, CEO Josh Silverman noted that his company is “vastly less” dependent on goods coming from China than most of its peers.
And the focus remains on better serving the user base. In the Q1 earnings press release, management noted: “To address the evolving tariff landscape, we established a small operational task force focused on delivering creative solutions for the Etsy marketplace community.”
The struggles continue
It’s clear that Etsy has some positive traits to hang its hat on. However, investors have lost some confidence in its model.
Though it did beat expectations last quarter, the company’s financial performance left much to be desired. Gross merchandise sales fell 6.5% year over year as less activity occurred on the platform. The leadership team thinks this key performance metric will drop again in the current quarter.
Etsy’s user base continues to shrink. The number of active sellers declined 11.3% year over year in Q1, while active buyers dipped 1.7%. For sellers, the problem might be that Etsy’s take rate (its revenue as a percentage of gross merchandise sales) has trended higher over time without greater sales volume. For buyers, the challenge remains to drive repeat purchase behavior.
Falling sales and a shrinking user base are undoubtedly troubling signals. They’re also clear signs that Etsy’s business has become more cyclical. This wasn’t the case throughout most of its history. And during the COVID-19 pandemic, it saw tremendous success.
However, since peaking in 2021, gross merchandise sales have fallen in every subsequent year. Now, the uncertain macroeconomic backdrop is creating another major headwind for consumers, leading them to scale back on discretionary purchases.
Wait for improvements
Etsy’s shares have been beaten down so far that their valuation now is hard to overlook. As of this writing, the stock trades at a forward price-to-earnings ratio of 9.8. That’s less than half the multiple of the broad S&P 500 index.
The shares are in bargain-basement territory. In my opinion, though, investors should be patient and wait to buy them until Etsy gets back to reporting consistent gross merchandise sales growth, and its base of buyers and sellers starts to expand again. Those would be clear indications that things are heading in the right direction.
Neil Patel 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.
