Better Bull Market Buy: Alibaba vs. Etsy Stocks

alibaba group (Baba 1.47%) and Etsy (ETSY -0.85%) Two of the most declining e-commerce stocks right now are: Chinese e-commerce stocks have struggled with restrictions due to a weak economy and government crackdown, while Etsy has seen growth stall after booming during the pandemic.

But a new bull market could shift market sentiment, boosting both stocks that are unloved in a stronger economy. But which of the two is better to buy? Two Motley Fool contributors offer their thoughts on how to outperform in the coming bull market.

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Alibaba has low prices and great growth potential.

Keith Noonan: The past few years have been pretty brutal for Chinese tech stocks in general. In addition to concerns that national governments will exert greater control over influential technology companies, ongoing pandemic-related issues have dampened investor enthusiasm and a sluggish macroeconomic recovery has derailed some previously promising growth stories. As geopolitical tensions between China and the United States increase, bearish sentiment surrounding the U.S. technology sector has also increased.

A number of macro issues and uneven business performance have caused Chinese e-commerce and cloud computing giant Alibaba to suffer a decline in its stock price. The company’s shares are down 18% year to date and 77% from their peak.

Despite macroeconomic headwinds and a massive stock sell-off, Alibaba’s recent growth has been encouraging. Third quarter revenue increased approximately 9% year-over-year to approximately $30.8 billion, and non-GAAP (adjusted) earnings per American depositary share increased 21% to $2.14.

BABA PE Ratio (Forward) Data from YCharts

At just 8 times this year’s projected earnings, Alibaba stock looks cheap and could rebound well above current levels. I think it’s likely that China’s e-commerce industry and overall economy will eventually record stronger growth, and Alibaba’s strong industry positioning, opportunities in artificial intelligence, and deeply discounted valuation make this stock likely to be a big winner. It suggests that there is. .

Of course, Etsy is also generating solid profits and trading at a reasonable revenue multiple, but I think smaller companies are at greater risk of stagnation.

The specialty e-commerce company’s total merchandise sales actually fell 1.4% in the first three quarters of the year, with the company’s revenue growth underpinned by increases in fees charged for transactions conducted through its services. While this isn’t inherently worrisome, continuing to increase take rates could threaten platform engagement. And there already seems to be some softness on that side.

Although investing in Chinese companies comes with additional risks that investors should consider, we believe Alibaba’s current valuation leaves open the possibility for patient investors to see explosive returns.

Etsy’s Rebound Could Begin

Jeremy Bowman: There’s no doubt that Etsy has been struggling recently, and management has fully acknowledged that it’s disappointed with recent results. The company lost $1 billion on its Depop and Elo7 acquisitions a year ago, dealing a major blow to the company’s “House of Brands” strategy. It was also a clear sign that he had overpaid for both companies when he acquired them during the pandemic. Etsy later sold the Elo7 for much less than I bought it for over the summer.

Recent results have also been unimpressive, as gross merchandise sales (GMS) have been essentially flat over the past few quarters. But there is one important sign that things may be turning around in the online marketplace for handmade and vintage goods.

In the third quarter, the company saw its gross merchandise revenue growth stagnate, but its user base began to grow. The number of active sellers increased 19% year-over-year to reach 8.8 million, and the number of active buyers increased 3.4% to 97.3 million. While growth in active buyers may seem weak, this also includes sales of Elo7.

Sellers and buyers are starting to come back after a long lull and post-pandemic decline, which is likely to lead to a gradual rebound in sales and a nice uptick during the key holiday quarter.

Another reason Etsy needs to start recovering is that discretionary consumer spending will soon normalize following the shift from goods to services when the economy reopens. The expected decline in interest rates will likely help boost consumer spending on sites like Etsy. The stock has also rebounded from recent lows, rising more than 40% following its third-quarter earnings report, which appears to be indicative of a recovery and broader market trends.

Finally, Etsy stock is cheap, with an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of about 15 based on annual guidance. Even based on generally accepted accounting principles (GAAP), the stock is only trading at a price-to-earnings ratio of about 30. That said, if Etsy’s top-line growth can revive, the stock has a lot of upside potential in the next bull market.