Artificial intelligence (AI) has taken the world by storm this year. The most obvious winner of this paradigm shift has been Nvidia (NASDAQ: NVDA). The company's graphic processing units (GPUs), which are the gold standard for improving video game performance, were found to be equally effective in speeding up data processing and number crunching in complex applications. This made them a perfect choice for use in cloud computing, data centers, and, most recently, AI.
In its fiscal 2024 second quarter, which ended July 30, the company generated record revenue of $13.5 billion, up 101% year over year, while earnings per share soared 854% to $2.48. Those results have investors and analysts alike positively giddy about Nvidia's prospects. The stock has already surged 189% so far this year, but analysts' consensus price target of $624 on Nvidia implies an upside of 48% from its current price in the next 12 months.
Yet there's another AI stock that the analysts think has even more upside potential than Nvidia: online retailer Etsy (NASDAQ: ETSY). That stock has a 12-month price target of $108 -- implying an upside of 66%. Here's what has analysts so bullish about Etsy's future.
Not your typical AI stock
When you think AI, Etsy might not immediately come to mind. The company is known for its online retail platform, which caters to third-party sellers who specialize in vintage, personalized, one-of-a-kind, and handmade goods. Based on that description alone, Etsy would more accurately be viewed as an e-commerce company -- and rightfully so.
However, investors should resist the temptation to view AI myopically. Instead, pay attention to specific instances where a compelling use case for AI could give rise to a network that's difficult to replicate. That's exactly how Etsy fits in.
The company boasts over 8.3 million active sellers, peddling their wares to more than 96 million active buyers, forming an ecosystem that provides Etsy with a treasure trove of data. Etsy's AI sifts through it all, finding patterns among the data that might not be evident to the naked eye. These connections are then used to more accurately match users with the products they're most likely to be interested in, and give them more useful recommendations.
That's not all. Etsy boasts a growing team of engineers and data scientists who are constantly optimizing the user interface, running experiments, and conducting an endless series of tests to refine and tweak their AI models to better connect buyers with the perfect products. The results are often so successful that the details are published in scientific journals dedicated to data science and machine learning, a branch of AI.
Furthermore, the recent emergence of generative AI has created a cottage industry designed to help sellers craft unique designs, generate compelling product descriptions, and develop engaging social media posts to help sell their products. These tools also help sellers improve their overall results.
This shows that Etsy's connection to AI is undeniable.
By the numbers
While the past year has been challenging for online retailers, the improving economic outlook and waning inflation are beginning to boost the e-commerce industry again. Consumers, who were a bit hobbled by the macroeconomic headwinds, are beginning to flex their spending muscles -- and the progress is increasingly evident in Etsy's results.
For the second quarter, Etsy's consolidated gross merchandise sales were roughly flat year over year at $3 billion. This resulted in revenue of $629 million, up 7.5%, and -- excluding one-time charges -- net income of $73 million, which was also flat. While that might not seem like something to write home about, it was an improvement compared to the declines it suffered in 2022.
Furthermore, Etsy CEO Josh Silverman says there's more to come, citing the company's largely untapped market. In comments at a recent investor conference, Silverman noted that only 1 in 3 women and only 1 in 10 men in the U.S. had shopped at Etsy over the past year. And those who had shopped on the site had only visited it three times on average during that time. This represents an opportunity to grow, not only by attracting new customers, but also by increasing the number of visits by existing shoppers.
Etsy is also making progress with its expansion in international markets. The template that was successful in the U.S. is being applied in the U.K., Germany, France, and the rest of Western Europe.
Wall Street remains bullish on Etsy
While investors wait for Etsy to make further progress, it represents a compelling opportunity. The stock is currently selling at a forward price-to-earnings ratio of 14 and less than 3 times next year's expected sales.
Some of Wall Street's best and brightest believe the selling has gone too far. Among the 31 analysts who cover Etsy, 15 rate it a buy or strong buy, and only one recommends selling. There's also the previously mentioned $108 price target, which implies a 66% upside compared to Wednesday's closing price.
The improving economy and the company's large market opportunity, combined with its compelling valuation and a rousing endorsement from Wall Street, suggest that now is a great time to buy Etsy stock.
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