This E-commerce Titan Is an Absolute Cash Machine; Its Stock Could Surge Another 50%

Normally, this would be the "most wonderful time of the year" for the retail sector, but a swirl of economic concerns mixed with ongoing tariff uncertainty have dampened the mood. This seasonal stress can be seen in the S&P Retail ETF, which is trailing the S&P 500 and languishing toward the bottom of the pack, whether that's over the past month or on a year-to-date basis.

Of the 77 stocks in the retail ETF, Etsy (NYSE: ETSY) is one of handful of recently surging standouts that has caught my eye thanks, in part, to its top-five performance over the past month (up 17%), top quintile rank over the past 3 months, and its top-10 year-to-date gain of more than 40%.

Even so, this $7.3 billion pure-play e-commerce company is still down about 75% from its November 2021 peak, which to me suggests there's still plenty of room to run for this 20-year-old marketplace for handmade and vintage goods.

A cash machine

Aside from the unique gifts and goods Etsy's legion of sellers offer, the company also has a loyal base of repeat users who are typically devoted to supporting small businesses and personalized products and service that mass retailers and big-box chains simply cannot match.

Image source: Getty Images

Ultimately, the Brooklyn, NY-based company is running a business that on at least three key levels -- stable profits, extra-wide margins, and over $700 million of annual free cash flow -- I think will be increasingly appealing to investors and continue its ongoing rebound.

Specifically, through Q2 in July, Etsy repurchased over $525 million of its own shares in the first six months of the year, and still ended the period with $1.5 billion in cash and equivalents. Whereas retailers like Amazon constantly reinvests in new technology and greater efficiency, Etsy's groove now is more toward hoarding cash and returning it to shareholders.

Like any retailer or discretionary business, Etsy is exposed to economic cycles as well as consumer confidence and spending trends. There are also risks among some Etsy sellers concerning costs and fees that will continue to need addressing, but to that point, the company's emerging AI-powered personalization efforts are focused on improving conversion rates and repeat purchases.

Where Etsy differentiates itself from most of its larger peers, however, is in the fact that it runs an asset-light operation that has no warehouses, no logistics costs, only 2,400 employees and -- extra importantly in the tariff era -- minimal inventory exposure.

What that looks like on paper, and further delineates the stock and the possibility of further gains, is its 13.5% buyback yield (the percentage of shares repurchased compared to its market value) over the past 10 years which lands it in the 94th percentile, as well as its 72% gross profit margin over the past 12 months that ranks Etsy in the 93 percentile of the vast consumer discretionary sector over the past decade.

Where the company once showered preference for chasing top-line growth and GMV (gross merchandise value) gains, it has more recently morphed into a more mature, high-margin digital franchise.

Taken together, 10% to 12% share shrinkage over the next year or so, plus margin-driven earnings growth and slight multiple expansion (although still far short of peak levels) could easily see an additional 50% move in Etsy stock. Add in some macro tailwinds, such as lower rates, increased confidence or tariff clarity, and even further upside is possible.

Next steps

Etsy will report Q3 results before the open Oct. 29th, but given that the stock has moved about 70% from the market lows in April and that 20 of 31 analysts currently rate it a hold, short-term upside won't be easy to achieve.

It's also worth noting that while Etsy has beaten sales estimates in 18 of the past 20 quarters, it has missed earnings-per-share estimates 5 of the last 7 times. Long-term investors who want a highly profitable, cash-generating business that is shareholder-friendly and dominates a unique and hard-to-replicate retail niche, should know this and be ready to buy any dip.

Matthew Nesto has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Etsy. The Motley Fool has a disclosure policy.