The pandemic was a defining moment for e-commerce. With physical stores closed and consumers stuck at home, online shopping skyrocketed, driving unprecedented growth for many e-commerce platforms.

Consumers quickly adapted to digital purchasing for everything from essentials to luxury goods, leading to record-breaking sales and profits.

However, as the world has returned to normal, many of these companies have struggled to maintain those high demand levels.

While the initial surge of pandemic-fueled spending has tapered off, the challenge now is finding sustainable ways to grow in a market that’s no longer driven by extraordinary circumstances.

Over the years, Etsy (ETSY) has built a significant marketplace where buyers and sellers connect over unique, often handmade items.

Recently, the company has shifted its strategy, focusing on specialized marketplaces dedicated to specific product categories, such as musical instruments and fashion.

This targeted approach has helped Etsy stand out and attract more customers, deepening its marketplace’s appeal.

The pandemic was pivotal for the company, as demand for handmade masks and crafting supplies surged.

Although it’s unrealistic to expect that level of demand to return, Etsy has shown it can thrive when consumer confidence and discretionary spending increase..

As the company strengthens its platform, profitability could rise, leading to an upside in the stock.

One key advantage for Etsy now is its low valuation and ongoing stock buybacks. While it has faced recent challenges, including its removal from the S&P 500 and a poorly timed acquisition of Depop, much of this bad news is already priced into the stock.

The company’s large addressable market, estimated at $2 trillion, indicates significant room for growth, with the company currently capturing only about 2%.

This shows that Etsy’s recent sales slowdown isn’t due to market saturation, and there’s a clear opportunity for expansion.

A major part of the company’s recent efforts has been upgrading its search engine to prioritize product quality.

The new system promotes high-quality, unique items with good reviews, aiming to improve customer satisfaction and increase repeat purchases.

To further engage shoppers, Etsy is encouraging them to think of its platform earlier in their shopping journeys.

The company is rolling out themed suggestions and curated product collections to help guide customers in discovering items before they even know what they want.

Additionally, Etsy has cracked down on sellers who violate its policies, such as those engaging in dropshipping, to protect the integrity of its marketplace.

Looking ahead, the company is testing a subscription-based loyalty program to encourage repeat buying.

The program offers benefits like free shipping and discounts, aiming to create recurring revenue and foster stronger customer loyalty, much like Amazon’s (AMZN) Prime.

Though Etsy faces some challenges, particularly from high rates and inflation affecting consumer spending, it is well-positioned for growth.

With a vast addressable market, enhanced platform features, and an emphasis on quality, Etsy is set to benefit as consumer confidence rebounds, offering potential upside for investors.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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