Etsy, Inc. (NASDAQ:ETSY) is worth roughly one-third what it was during its pandemic heyday. To some, it is a victim of pushed forward demand and hypernormal growth destined to never repeat. To others, it is a floundering business struggling to find its way in the post-Covid economy.

The polarizing marketplace for creative goods did little to settle the debate during its fourth quarter earnings call. Revenue grew 13% and topped Wall Street expectations while profits fell 31% and missed the mark. Etsy traded in a $13 range on the day of the report but appropriately closed where it opened.

Two months into a topsy turvy 2023, the market still isn’t sure what to make of Etsy. Clever Covid masks are no longer a thing and shopping from home has subsided. And yet the platform has maintained a loyal following and is discovering new ways to grow.

Let’s sort out some of the main arguments from the bulls and bears. 

Etsy: The Positives

1. Revenue is growing off a massive base. After sales more than doubled to $1.7 billion in 2020, Etsy managed to grow its top line by 35% and 10% in 2021 and 2022 respectively. 
2. Etsy.com is the third most visited e-commerce website in the U.S. According to similarweb; the marketplace trails only amazon.com and ebay.com in terms of monthly visits. More Americans visit etsy.com than both walmart.com and target.com.
3. Revenue diversification is reducing the risk of an Etsy investment. Predominantly dependent on attracting buyers and gross merchandise sales (GMS), Etsy is offering more tools and services to sellers than ever before. This should improve the company’s capacity to find and retain sellers and create new revenue streams that de-risk the stock.
4. Favorable earnings comps are near. Etsy will face easier year-over-year earnings comparisons in the back half of 2023. Consensus earnings growth estimates for 3Q23 and 4Q23 are 108% and 30%, respectively. A return to bottom-line growth could go a long way in restoring investor confidence in the growth game.

Etsy: The Negatives

1. A return to ‘normal’ will pull consumers away from Etsy. Concerns have long swirled that as shoppers spend more time in stores and less at home, Etsy traffic and GMS will suffer. Recent performances have not reflected this, but this remains a valid concern, especially as consumers wrestle with inflation and rates in the ‘new normal’ economy.
2. Active sellers and buyers numbers are down. Etsy’s active sellers and active buyers figures were down roughly 1% in the fourth quarter. This suggests the pause button has been hit on both entrepreneurial spirit and purchasing behavior. How much of this is macro-driven and temporary remains to be seen. Management has noted efforts to re-engage lapsed buyers and attract more men to the female-led platform.
3. A housing market slowdown will inhibit demand. Many of Etsy’s products fall under the homewares and home furnishings category, its biggest division in 2021. In addition to spending less time sprucing up homes post-Covid, a weakened housing market bodes poorly for home goods demand.
4. Marketing expenses are climbing to fend off competition. As traditional retailers and upstart e-commerce challengers alike (Walmart, Costco, Amazon, Wayfair, etc.) enter the unique and creative goods space, Etsy is spending mightily to protect its turf. Much of the higher revenue generated by raising transaction fees is being poured back into marketing. This was a big part of why operating expenses rose 21% last quarter. 

Overall 

At the end of the day, the value of any stock comes down to what investors are willing to pay for a company’s future earnings. In Etsy’s case, this is now 45x. 

It is a multiple that may seem high but remember, this is a stock that traded upwards of 95x earnings back in 2021. On the other hand, the average consumer discretionary stock trades around 32x. So to pay the premium, investors have to believe Etsy can grow profits at least one-third more than the sector average. 

Amazon’s P/E ratio based on 2023 earnings is 67x, but it has a rapidly growing cloud business in AWS. Ebay, experiencing anemic bottom line growth, garners an 11x forward P/E. For Etsy to trade in between the two certainly makes sense. But where exactly in between is unclear and depends on upcoming results and guidance.

Wall Street has been of no help in nudging investors in one direction. Since the Q4 update, analysts have only reiterated their previous opinions — 10 buys and 7 holds with price targets ranging from $74 to $170. 

Considering the cautious macro backdrop, calling Etsy a ‘modest bargain’ seems appropriate for now.