1 Amazing Growth Stocks Fall 77% – You Will Regret Not Buying During the Downturn

Investing in growth stocks requires a lot of patience and pain tolerance. Growth stocks can rise much faster than the market, but they can also fall more sharply.

In such a case, Etsy (ETSY 5.72%). Three years later, the stock, which once soared on the back of heavy buying at the start of the pandemic, has had a major negative impact on earnings. The stock is currently trading about 77% below its all-time high reached in 2021.

Admittedly, Etsy’s latest earnings report was disappointing. Gross merchandise sales (GMS) decreased by 0.7% from the previous year, ending the year with a decrease of 1.2%. Management expected further year-over-year declines in GMS, and guidance was not very encouraging.

But now may be a great time to buy Etsy stock. Here’s why:

Lasting competitive advantage

Etsy’s position as the leading marketplace for non-commoditized, customizable goods is strong. And that competitive advantage is also reflected in our finances. Even though product sales declined in the second half of this year, Etsy was still able to grow its revenue. Sales increased 4.3% in the fourth quarter and 7.1% for the full year.

How can marketplaces increase revenue despite low merchant sales? Simple: Take a bigger bite out of the apple. Etsy’s seller fees increased from 5% to 6.5% in 2022. We are also encouraging more sellers to use our advertising platform. As a result, the take rate rose from 17.8% before the fee hike to 21% in the most recent quarter.

One might think that increasing take rates would incentivize sellers to find other marketplaces to sell their products, but that’s not actually the case. Despite some initial pushback, active sellers increased from 7,654 before the price increase to 9,035 by the end of 2023. This speaks to the fact that he is good at Etsy. of Where consumers buy customizable and other non-commoditized products.

Competition is winning now, but the tide will change.

Etsy’s fourth quarter earnings presentation included several slides comparing Etsy’s performance relative to the overall e-commerce industry and select categories.

The recent pattern is clear. Etsy has been experiencing significantly above-average growth in the overall e-commerce market for several years, but it has been losing market share over the last two years. But if you look at categories like apparel, toys and games, and party supplies, you’ll see that Etsy performs much better in these areas than pure e-commerce companies.

CEO Josh Silverman provided further context on Etsy’s earnings call.He said Amazon, walmartCurrently, the only e-commerce companies that have gained market share are Temu and SHEIN. And the reason they’re winning right now is because they can offer better prices than everyone else, either through economies of scale or simply by outspending everyone else. (Temu also dropped about $50 million in Super Bowl advertising and promotions.)

Currently, preference is given to the cheapest version of the product. There is a lot of uncertainty in the economy and inflationary pressures remain very strong. But Silverman believes the tide will change eventually, if not immediately. And if you look at how Etsy stacks up against its direct competitors in its biggest categories, you’ll see that Etsy has more It’s reassuring to know that you stand to benefit.

Stock prices are extremely low

Investors punished Etsy stock harshly after several quarters of disappointing total merchandise sales growth. And while it may not have been worthy of the sky-high valuation it was trading at in late 2021, the stock looks downright cheap today.

The stock currently trades at just 19.4 times forward earnings. Lower than that is S&P500 Despite this, analysts are expecting average earnings growth of 22.6% over the next five years. This also means that Etsy’s PEG ratio is less than 1, which indicates that the stock is undervalued.

Etsy is also cheap in terms of sales. The stock is trading at less than three times expected sales. As earnings reaccelerate due to GMS’ turnaround and higher take rates, that multiple should prove well below fair value.

Admittedly, investing in Etsy requires patience. However, management managed to hold on to pandemic gains and improve its position in handcrafted, non-commoditized products. As long as their position is intact, investors should feel comfortable holding the stock, even if the price is volatile.