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3 Reasons Why Etsy Stock Could Make You Rich

Etsy (NASDAQ: ETSY) is now the fourth-most-visited e-commerce site in the U.S., according to data analyst platform disfold.com. It's building tremendous brand power, and that is reflected in the company's triple-digit-percentage level of growth in gross merchandise sales (GMS) over the last year.

With the stock price up more than 2,000% over the past five years, it's easy to feel like you've missed the opportunity. But that's not the way to think here. In fact, Etsy's success is why investors should consider buying shares even after that phenomenal run.

Here are three reasons why.

A globe with yellow lines circling around it.

Image source: Getty Images.

1. Think big

Etsy's brand power is increasing in a massive e-commerce market. The company estimates the total market opportunity at $1.7 trillion, but the company's GMS in 2020 was just $10.3 billion. With GMS growth accelerating to 118% year over year in the fourth quarter, it's clear that Etsy is still just scratching the surface of the opportunity in its home market.

"I would say Etsy is at the very early stages of unlocking the opportunity in the U.S.," CEO Josh Silverman said at an investor conference in November.

2. Adaptable marketplace

Most marketplaces fail to get off the ground, which makes Etsy's success more impressive. A new entrant might attract sellers, but there are not enough buyers (and vice versa). It's tougher to expand overseas, where relying on exporting and importing between countries causes slower delivery times, which can dampen engagement.

But Etsy is gaining serious ground in the U.K. and Germany, two large international markets. The share of domestic sales is now over 50% of total GMS in each market, which shows these markets establishing a vibrant local marketplace. Total GMS in the U.K. soared 189% year over year in the fourth quarter, while Germany saw GMS increase by 109%.

As Etsy penetrates different markets around the world, it is further separating itself from the shopping experience at mass retailers. Because Etsy offers a dynamic marketplace of sellers with unique items for sale, the marketplace can easily adapt to the tastes of different cultures all over the world.

Etsy is now a top-five e-commerce site in the U.K., according to Comscore, but there is more to come. During the pandemic, Etsy started to see the domestic share of sales increase in other international markets where the domestic threshold was still less than 50%.

Etsy has a powerful competitive advantage built around a wide selection of unique items, but it's still in its infancy as a global e-commerce platform.

3. The stock is not expensive

Etsy has momentum, but investors should brace for potential volatility in the near term. While management's guidance points to recent growth trends continuing through the first quarter of 2021, growth is expected to decelerate starting in the second quarter.

The expected slowdown is based on e-commerce projections from third-party research data management referenced during the fourth-quarter earnings call. Plus, Etsy will be lapping a spike in face mask sales during Q2 2020.

Still, a near-term deceleration would only overshadow an incredible growth story. Etsy was posting terrific numbers before COVID-19, with GMS increasing by 26% and revenue up 35% in 2019. Those growth rates serve as a useful guide for what to expect beyond the pandemic, and it's all Etsy needs to maintain to deliver handsome gains for investors.

Moreover, Etsy's price-to-free-cash-flow multiple of 39 looks relatively low for a company that offers great long-term growth prospects, especially compared to Amazon's valuation.

ETSY Price to Free Cash Flow Chart

ETSY Price to Free Cash Flow data by YCharts.

Even though the share price has rocketed 237% over the last year, the valuation is not that high for a company that is just starting to hit its stride in large international markets and is still in the early stages of penetrating the U.S. e-commerce market.

Etsy is simply one of the best e-commerce stocks to own for the long haul.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. John Ballard owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Etsy and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

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