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Etsy (NASDAQ: ETSY) was once a fantastic business to own. In the five years leading up to their peak price in November 2021, shares were up a jaw-dropping 2,160%. But it’s been a different story since then, mainly due to a growth slowdown.

As of this writing, this e-commerce stock trades 81% below its all-time high. And it’s been a difficult year, with shares down 32% just in 2024 (as of Sept. 26). But here’s why Etsy is a growth stock to still consider buying right now.

Competitive advantages

The retail sector broadly, and online shopping specifically, is very competitive, as consumers have an unlimited number of choices. But Etsy has carved out a successful niche thanks to its narrow focus on offering differentiated products. In fact, a recent survey revealed that 83% of buyers agree that Etsy has items they can’t find anywhere else.

This runs counter to Amazon‘s strategy, the dominant force in the industry. The tech giant’s focus is on selling mass-produced products in huge quantities as fast as possible. Etsy doesn’t play this game.

What’s more, Etsy benefits from network effects. It’s a two-sided marketplace that consists of 96.6 million buyers and 8.8 million sellers. More sellers posting more goods makes the site valuable for consumers. And with a larger audience, sellers immediately have a wider customer base to generate revenue from.

The presence of network effects is important to understand. The setup makes it hard for any new entrants to compete directly with Etsy given its size and number of users.

Growth potential

The last couple of years have been difficult for this business. Etsy registered tremendous growth during the pandemic, as consumers flocked to online shopping. However, things have cooled down. In the three-month period that ended June 30, the company reported gross merchandise sales of $2.9 billion, which was down 2.1% year over year.

Management blames the challenging macroenvironment. Inflation, while on the way down, is still on top of consumers’ minds. Discretionary spending remains under pressure.

But Etsy still has huge growth potential. According to the leadership team, the company’s total addressable market is estimated to be $500 billion. It’s a good idea to take these figures with a grain of salt. Nonetheless, you get the idea of how big the opportunity is.

A key part of Etsy’s playbook is to become more valuable to its sellers by adding new features. Things like discounted bundles and lists of quality updates were introduced recently. And for buyers, it’s all about becoming a more frequent shopping destination for various occasions. Better search discovery is a focal point. It could lead to shoppers finding the right products, which could result in repeat purchases.

Financial position

Etsy’s poor stock performance might suggest that the business is in financial trouble. But that’s just not the case. The company is consistently profitable.

In the past five years, Etsy’s operating margin has averaged 15.9%. This is a scaled-business model that can leverage its expenses to produce positive net income each year.

Moreover, Etsy rakes in lots of free cash flow. Executives have typically used this capital to fund share repurchases. In the first six months of 2024, $309 million was used for this activity.

Etsy’s valuation

In addition to Etsy’s competitive advantages, growth potential, and financial position, investors should consider buying the stock because of the stock’s valuation. Shares trade at a dirt cheap forward price-to-earnings ratio of 12.3. That’s a 47% discount to the broader S&P 500.

While Etsy’s struggles to boost sales might continue for a little longer, investors who can look out over the next few years are set to be rewarded if they buy the stock today.

Should you invest $1,000 in Etsy right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Etsy. The Motley Fool has a disclosure policy.

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