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Etsy (ETSY -0.27%) has witnessed a dramatic downturn, plummeting 83% from its record high in November 2021 after an astonishing increase of 2,170% over the previous five years. As it stands, shares are available at a notably low forward price-to-earnings (P/E) ratio of 8.9, potentially attracting value-focused investors who thrive in the current market climate.
Nevertheless, it is prudent for potential investors to proceed with caution. One significant concern surrounding Etsy’s future should not be overlooked.
Etsy’s Warning Signs
A key indicator of a robust business is its capacity to sustain consistent demand. This implies that consumers continue to engage with its offerings even amid varying economic conditions. Firms that can perform well during both prosperous and challenging times are often viewed favorably by investors.
However, it appears that Etsy may not fit this mold. Although the company reported a modest revenue increase of 2.2% in 2024, gross merchandise sales (GMS)—a critical performance measure indicating transaction volume on the platform—declined by 4.4%. Notably, GMS has experienced a downturn for three consecutive years following its peak in 2021.
This trend underscores a significant risk for Etsy: the business is exhibiting greater cyclicality than many investors initially anticipated.
This is particularly concerning in light of the broader industry trend. Grand View Research projects that global e-commerce spending will rise by 19% annually through the end of the decade, suggesting a supportive environment for a company like Etsy. However, the current narrative does not align with this growth expectation.
According to Etsy CEO Josh Silverman, the decline is primarily due to “pressure on consumer discretionary product spending.” This is understandable, considering Etsy’s main offerings—such as furniture, apparel, and jewelry—are considered discretionary items that consumers are likely to postpone purchasing during inflationary periods or economic downturns.
In addition, Etsy is facing challenges related to its user base. A 10% decrease in active sellers and a 1.1% drop in active buyers were observed between the fourth quarters of 2023 and the previous year, indicating a deteriorating value proposition for platform users.
A Shift in Dynamics
It’s easy to overlook this cyclicality, especially given Etsy’s meteoric rise preceding the COVID-19 pandemic, which saw GMS and revenue surging by 75% and 124%, respectively, from 2016 to 2019. The pandemic temporarily accelerated growth, but now the company faces a stark reversal.
The retail landscape, particularly within the e-commerce sector, is fiercely competitive. Various platforms and brands are vying for consumer attention and spending power. Etsy has historically distinguished itself through its emphasis on unique, vintage, and handcrafted products.
This unique positioning enables consumers to find items that are not readily available elsewhere, facilitated by a vast network of sellers who monetize their hobbies. Consequently, the shopping experience on Etsy differs greatly from what one might encounter on larger platforms like Amazon.
However, one of the potential drawbacks of Etsy’s distinctive offerings is the challenge of encouraging repeat purchases. Customers may visit Etsy for specific needs but could wait years before returning for another purchase—this is reflective of personal experiences as well.
As of Q4, Etsy’s habitual buyers—defined as those who shop on six or more days and spend at least $200 within a year—dropped to 6.4 million, down from 8.1 million three years prior. This decline in recurring customers poses a concerning signal for the company’s trajectory.
While Etsy’s stock is trading at an attractive valuation, investors may want to hold off on buying shares until there is clear evidence of a rebound in GMS growth.
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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