Down 34% in 2023, can Etsy stock bounce back in 2024?
Etsy (ETSY 1.41%) It’s one of the stocks that barely recovered its 2021 highs. In fact, the e-commerce site has continued to decline since reaching its peak in 2021 and is currently down more than 70% from its all-time high. While investors would like the stock to regain its all-time highs, many would be happy to see the stock regain some of its value. However, the company hasn’t done much to instill confidence in its investor base with its recent results. So could 2024 be the year of a rebound for Etsy?
Product sales on Etsy did not increase.
Etsy is the market leader in custom and handcrafted items, and has seen a surge in adoption during the COVID-19 lockdown as many people search for personalized gifts for family and friends. Since its initial expansion, Etsy hasn’t seen much growth in total merchandise sales.
| period | Third quarter total product sales | 3rd quarter sales |
|---|---|---|
| 3rd quarter 2020 | 2.63 billion dollars | $451 million |
| 3rd quarter 2021 | $3.11 billion | $532 million |
| 3rd quarter 2022 | $3 billion | $594 million |
| 3rd quarter 2023 | $3.04 billion | $636 million |
Data source: Etsy.
So how will Etsy grow its revenue if it doesn’t grow its gross merchandise value (GMS)? This has to do with advertising, payment processing, and price increases implemented by Etsy. But there is only so much juice that can be squeezed from these revenue streams. For Etsy to grow meaningfully again, product sales need to be moving in the right direction. However, future guidance does not indicate that is happening. Management expects GMS to decline in the low single-digit range in the fourth quarter.
If Etsy has peaked and has no growth left in the tank, you need to work on increasing profitability. Unlike many companies, Etsy did not lay off any employees in 2023. This may mean that staffing is adequately staffed or that management does not feel the need to make cuts.
Etsy’s finances were distorted by several one-time costs in the third quarter of last year. So while I’m hesitant to use metrics like adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), I think they’re useful here because companies can subtract whatever they want.
In the third quarter, Etsy’s adjusted EBITDA increased 8.6% year-over-year, and margins increased 40 basis points. That’s not market-beating growth, which makes me question why I still own Etsy stock. However, there is one reason I haven’t sold my position yet, although it’s not a great excuse.
There’s a reason Etsy’s stock is cheaply valued.
Etsy’s stock price has fallen sharply despite its relatively stable finances. This is because investors are reluctant to pay much for a significant portion of Etsy’s business due to non-existent growth. It may seem obvious, but it’s a reminder that stocks trade like growth stocks and will fall apart if they don’t meet expectations.
This is exactly what happened at Etsy. The stock currently trades at a ridiculously cheap price of 16 times 2024 earnings.
ETSY PE Ratio (1 Year Forward) data from YCharts. PE Ratio = Price to Earnings Ratio.
But one question remains. Is Etsy worth owning if it doesn’t outperform the market? I’d say no, but I’m hesitant to sell because I don’t want to sell at the bottom of the market and have to deal with a dirt cheap valuation. Since the stock price has risen 30% since November 1st, I think I may use this opportunity to get out.
There is no reason to own Etsy stock if Etsy can’t start selling a full range of products. With the company proving it can’t do that for the second year in a row, I’m ready to move on, especially keeping in mind that much better investments are available.
