Shares of Etsy (ETSY -1.18%) fell dramatically after it reported full-year 2024 earnings, with the stock off by around 10% or so as of this writing. But looked at over the long term, that drop is barely noticeable because the stock has now fallen more than 80% from its peak in late 2021. Here’s why there could be more trouble to come for the company.
What does Etsy do?
Etsy operates marketplaces that connect buyers and sellers. Its most prominent business is its namesake platform, which accounted for around 86% of the company’s revenue in 2024. This business unit offers creators and artists the opportunity to sell their wares directly to customers.
Image source: Getty Images.
Etsy also owns the Reverb marketplace, where musical instruments can be sold, and Depop, which is centered around secondhand clothing. Together its smaller platforms contribute about 24% to the income statement’s top line, split roughly evenly between them. Pretty clearly, the Etsy platform is the most important business.
Investor interest in Etsy surged following the coronavirus pandemic, with the stock rising more than 500% between the start of 2020 and its high-water mark in 2021. As is common on Wall Street, a grain of truth was turned into an avalanche of investor enthusiasm. Indeed, while people were stuck at home, Etsy was a valuable tool for buyers and sellers to connect. However, once the world learned to live with COVID, Etsy’s marketplace was nice, but certainly not a necessity. Investors dumped the stock and it is now basically back to where it started out in 2020.
Etsy’s business cools off, again, in 2024
There were a couple of key facts that should trouble investors in Etsy’s 2024 financial results. The headline figure is that the value of the merchandise sold on Etsy’s platforms fell 4.4% for the year. That follows a 1.2% decline in 2023 and a 1.3% decline in 2022. Clearly, Etsy’s business is shrinking at this point.
Here’s where things get interesting. In 2020 merchandise sales more than doubled and they rose another 31% in 2021. That’s massive growth, driven largely by the pandemic. And many new buyers and sellers likely found Etsy during those years. Today, however, it appears that Etsy has saturated the crafts market.
That view is highlighted by the fact that the number of “active buyers” fell 2.6% year over year in the fourth quarter of 2024. Those active buyers bought 3.5% less, on average. And the number of “habitual buyers” fell a more troubling 9.5%, suggesting that buyers might be getting bored with Etsy. Note that the fourth quarter includes the all-important holiday shopping period.
The odd piece of the puzzle is that Etsy’s earnings rose despite what appear to be weakening business fundamentals. But that’s largely attributable to the company buying back 12.2 million of its shares in 2024, or roughly 10% of its outstanding stock. That move effectively increased the earnings attributable to each remaining share by 10%. There’s nothing wrong with buying back shares, but in this situation the positive impact on earnings may be masking deeper problems the company is facing with its business, which looks to be stagnating, at best.
What’s Etsy worth?
Now that Etsy’s stock has lost virtually all of the gains it saw during the peak pandemic period, investors should probably be asking themselves what the company is worth. Using eBay as a reference, given that it, too, is a marketplace bringing buyers and sellers together, suggests Etsy could have further to fall. Etsy’s price-to-earnings ratio is currently around 19.5 versus eBay’s roughly 16.5. It isn’t unreasonable to think that Etsy’s P/E ratio could keep dropping with more stock declines leading that valuation ratio lower.
