The Nasdaq Composite has soared 55% in value since the start of 2023. Investor optimism is at elevated levels, sending this tech-heavy benchmark to record territory.
But not all companies have benefited from the strong rally. Investors who are looking for solid deals in the market can still find them. In fact, there’s one magnificent growth stock that is a smart buy for long-term investors.
Play the long game
Investing is done correctly when you adopt a five- or 10-year time horizon. With this framework in mind, Etsy (NASDAQ: ETSY) deserves a closer look.
To be clear, the online marketplace for unique and handcrafted goods has been dealing with a notable slowdown. Gross merchandise sales (GMS), a figure that tracks the total dollar volume of transactions occurring on the platform, totaled $13.2 billion in 2023. That was basically the same as it was in 2021.
After experiencing a surge in demand during the depths of the pandemic, things have certainly cooled off. People have returned to normal behavior, shopping more in-person at stores more often. Ongoing inflationary pressures also create a headwind for Etsy, which sells a lot of discretionary products.
These struggles help explain why shares have gotten absolutely obliterated. As of this writing, they trade at 77% below their peak price.
But there’s hope for investors who can look out over the next several years. I see three key reasons to be bullish about this business.
One factor that should excite prospective investors is how Etsy has successfully carved out a niche in the cutthroat e-commerce space. The executive team boasts that 83% of buyers say the site has merchandise they can’t find anywhere else. This is a startling statistic that demonstrates the true differentiation Etsy brings to the industry. It helps the company stand out.
Another reason to consider buying shares is because of Etsy’s powerful network effects, a critical trait that supports the company’s economic moat. At the end of 2023, the business had 96 million buyers and 9 million sellers on the marketplace across the globe. These numbers were up from a year ago, and they are substantially higher than pre-pandemic levels.
As more users come to the platform, it immediately becomes more valuable to existing users. That’s because there are more potential customers for sellers, and buyers have more places to shop.
Etsy’s consistent profitability is the final reason it’s a smart buy. This is a scaled and asset-light business model that’s been proven to generate positive earnings on a recurring basis. In the past five years, Etsy’s operating margin has averaged almost 17%.
Potential for solid returns
Now is the time to add this stock to your portfolio because expectations are so low. Shares are selling at a forward price-to-earnings (P/E) ratio of just 14.4. It would be a difficult task to find a deal as attractive as this in today’s frothy market environment, especially for a quality enterprise like this one.
I have confidence that Etsy will eventually get back to posting solid GMS and revenue gains, which will lead to profit growth as well. This can lift up the stock price.
The ongoing rise of online shopping, in both developed countries and emerging economies, is a powerful tailwind working in Etsy’s favor. There’s also heightened interest in entrepreneurship, which can help the business bring on a larger number of sellers over time. From the customer’s perspective, supporting small businesses is getting more attention these days.
If we look out over the next five years, I think there’s a high probability Etsy will work out as a winning investment.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Etsy. The Motley Fool has a disclosure policy.
Here’s Why This Magnificent Growth Stock Is a Smart Buy Right Now was originally published by The Motley Fool