Is This Beaten-Down Stock Finally On the Road to Recovery?

Shares of Etsy (NASDAQ: ETSY), an e-commerce specialist, soared in the early pandemic years as much retail activity shifted to online channels. However, that tailwind didn't last, and the stock has been southbound since reaching its peak in late 2021. It lost more than 70% of its value over this period, despite a strong performance year to date.

However, things could be about to change for Etsy. The company recently announced a partnership with OpenAI, the artificial intelligence (AI) leader behind ChatGPT, that could help the e-commerce platform turn things around. Etsy's shares jumped by more than 15% in one day following this development. Is the company finally turning things around?

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What went wrong with Etsy?

Etsy specializes in selling vintage, handmade, and rare items. While it is one of the leading e-commerce companies in this niche -- perhaps even the leading one -- there is a significant drawback. The kinds of goods one can find on Etsy aren't cheap, nor are they essential products people continue buying when the economy isn't doing particularly well. When the purse strings tighten, Etsy's products tend to be among the first that people decide to cut back on.

That's one of the key reasons Etsy has not performed well over the past few years, as it has felt the effect of these dynamics on its financial results. In the second quarter, Etsy's gross merchandise volume decreased by 4.8% year over year to $2.8 billion. The company's revenue did move in the right direction, but only by 3.8% year over year to $672.7 million. Etsy's earnings per share came in at $0.25, down 39% year over year.

Meanwhile, user growth on the company's platform is nonexistent. Active sellers dropped 7.8% year over year to 8.1 million, while active buyers were down 3.4% year over year to 93.3 million. Etsy is also facing significant competitive pressure from other platforms, including low-cost alternatives such as Temu and Shein. These (and other) factors explain why the stock has not performed well.

What the partnership with OpenAI entails

Many people have incorporated ChatGPT into their search habits. Etsy's partnership with OpenAI will enable U.S. merchants on the platform to sell products directly on ChatGPT, with items from the e-commerce company's merchants sometimes appearing as results to shopping-related queries on the chatbot. Customers won't need to take the extra step of leaving the app to check out items from Etsy although merchants will have to pay OpenAI a fee.

Considering how popular ChatGPT has become, this initiative could, eventually, meaningfully move the needle for a company that has struggled to attract enough business in recent years. This development gives Etsy an advantage, at least for now, since most e-commerce leaders, except for Shopify, have yet to establish similar partnerships with OpenAI.

Is the stock worth investing in?

Here is an important question for Etsy: Will it remain one of only two e-commerce specialists OpenAI partners with? It seems likely to me that OpenAI will eventually sign similar deals with other e-commerce giants. After all, while maintaining this advantage would be good for Etsy's business, OpenAI isn't in it for that reason at all. The AI specialist's goal is to attract more users and improve its own business. To that end, bringing even more e-commerce platforms to ChatGPT sounds like a great idea. So, even if Etsy sees a boost to its business as a result of this, it won't be a meaningful, long-term growth driver, in my view.

Where does that leave Etsy? With the same problems it has been dealing with for four years. Etsy does have some advantages. The company's brand name is closely tied to its core offering. Etsy also had a bit of a network effect, and could still benefit in the long run as the e-commerce industry takes off. However, the presence of alternative low-cost platforms and the fact that economic troubles continue to weigh on its results suggest that ChatGPT integration alone is unlikely to solve these problems.

Etsy's shares remain on the riskier side, and only investors comfortable with volatility should consider initiating a small position in the stock.

Prosper Junior Bakiny has positions in Shopify. The Motley Fool has positions in and recommends Etsy and Shopify. The Motley Fool has a disclosure policy.