3 Must-Know Facts About Etsy Before Buying the Stock

Even with the advent of smartphones, digital payments, and the internet, brick-and-mortar shopping still represents 84% of overall retail spending in the U.S. There's still a lot of room for online shopping to continue rising, especially in less developed parts of the world.

Etsy (NASDAQ: ETSY) is one such option when looking to put money to work to benefit from this trend. Before you decide to buy this e-commerce stock, here are three must-know facts that can help you gain a better understanding of the business.

1. Differentiated merchandise

Investors know that online shopping is dominated by the behemoth Amazon. The leader in the e-commerce space accounts for nearly 40% of all money spent online in the U.S. That's very impressive, and this position certainly makes it extremely difficult for any competitors looking to find a foothold in the industry.

But Etsy has found success by carving out a niche in the e-commerce arena, especially against Amazon. The online marketplace has done this by focusing on differentiated goods in various product categories, like home furnishings, apparel, and jewelry. According to a company survey, 83% of buyers agreed that Etsy has items they can't find anywhere else.

While Amazon thrives at being the "everything store" that prioritizes selling mass-market goods with fast and free delivery, Etsy prides itself on offering unique, handcrafted, and vintage merchandise that people struggle to find elsewhere.

2. Two-sided network effects

One identifiable trait of a high-quality company is the presence of an economic moat. In this case, Etsy benefits from powerful two-sided network effects.

On the one hand, there are 96.7 million active buyers on the marketplace. On the other side, Etsy counts 8.5 million active sellers. For buyers, having so many options to shop from makes the platform valuable. For merchants, Etsy's worldwide buyer base creates a massive group of potential shoppers. As the network gets larger, more connections can be made.

Even better, these network effects are global, not confined to any one specific city or country. Someone in New York might be looking at merchandise that a merchant in Paris is selling. This strengthens the network.

Etsy's industry position and scale are very hard to replicate. A well-funded entrepreneur that wanted to create a rival platform would have a hard time finding buyers when there are no merchants selling goods, and vice versa. This makes me believe that Etsy won't be disrupted anytime soon.

3. Etsy's current valuation

In the five-year period leading up to its peak price in November 2021, shares of Etsy skyrocketed 2,160%. That gain was well ahead of the total return the Nasdaq Composite Index registered during the same period. Investors were clearly pleased with the impressive trajectory of the business. Etsy's monster gain would've turned a $10,000 investment into a whopping $226,000.

However, slower growth following the pandemic boom has resulted in a pessimistic view from the investment community. Etsy reported $2.9 billion in gross merchandise sales last quarter, which was lower than the same period from two years ago. That's probably why shares trade 82% off that all-time high from roughly three years ago (as of Nov. 11).

But the huge dip makes the current valuation compelling for prospective investors. As of this writing, this stock trades at a forward price-to-earnings (P/E) ratio of just 12. That represents a more than 50% discount to the broader S&P 500. Investors who believe Etsy is a solid company might find no better time to scoop up the stock than right now.

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.