Three Crucial Facts to Consider Before Investing in Etsy's Shares
Three Crucial Facts to Consider Before Investing in Etsy's Shares
Despite advancements in technology and digital transactions, physical retail stores continue to dominate 84% of retail spending in the U.S. This leaves plenty of room for online shopping to flourish, particularly in underserved markets worldwide.
Etsy (ETSY -1.04%) is one such opportunity to capitalize on this trend. Before investing in this e-commerce stock, consider these three crucial facts to better grasp the business.
1. Unique merchandise
Investors understand that the e-commerce sector is dominated by giants like Amazon. The industry leader commands almost 40% of total online spending in the U.S. This dominant position makes it challenging for emerging competitors to gain a foothold.
However, Etsy has successfully carved out a niche, beating Amazon in specific product categories like home decor, clothing, and jewelry. A company survey reveals that 83% of buyers agree that Etsy offers goods not available elsewhere.
Unlike Amazon, which primarily sells mass-market items with speedy and free delivery, Etsy excels in offering unique, handcrafted, and vintage merchandise. This makes Etsy an attractive option for customers seeking specialized items that are hard to find elsewhere.
2. Powerful network effects
A strong indicator of a successful company is the presence of an "economic moat." In Etsy's case, its business model benefits from robust two-sided network effects.
On the buyer's side, there are 96.7 million active buyers on the platform. Conversely, Etsy boasts 8.5 million active sellers. For buyers, the sheer variety of available options enhances the platform's value. For merchants, Etsy's global consumer base offers a vast pool of potential customers. As the network expands, more business connections can be established.
These network effects are not limited to specific regions or countries. For example, a buyer in New York can browse merchandise offered by a seller in Paris, thereby strengthening the network.
Etsy's unique position and scale in the industry make it difficult to replicate. A well-funded rival looking to create a new platform would face challenges attracting buyers without sellers, and vice versa. This increases my confidence that Etsy won't be disrupted anytime soon.
3. Current valuation of Etsy
From November 2016 to its peak price in November 2021, Etsy's shares grew a staggering 2,160%. During the same period, the Nasdaq Composite Index only produced a modest return. This performance enticed investors, transforming a $10,000 investment into a substantial $226,000.
However, slowed growth following the pandemic boom has led to a gloomy outlook amidst the investment community. Etsy reported $2.9 billion in gross merchandise sales during its latest quarter, a decrease compared to the same period two years prior. This could explain why shares are now 82% off their all-time high from around three years ago (as of Nov. 11).
However, the substantial price drop makes the current valuation an attractive proposition for prospective investors. At the time of writing, the stock trades at a forward price-to-earnings (P/E) ratio of only 12. This represents a substantial discount compared to the broader S&P 500, offering an appealing opportunity for investors who believe in Etsy's long-term potential.
After recognizing the potential in Etsy's unique market position, you might be considering where to invest your money in this e-commerce stock. It's worth noting that despite a decline in its share price, Etsy's forward price-to-earnings (P/E) ratio remains relatively low, making it an intriguing investment opportunity in the realm of finance.
Considering the firm's robust network effects, which benefit both buyers and sellers, and its niche in the market, specific to unique, handcrafted, and vintage merchandise, Etsy's undervalued status could present a strategic investing opportunity for those with an interest in this sector.