How Good Has Etsy Stock Actually Been?

When it comes to online shopping, Amazon is without question the dominant force, with its massive selection and sprawling logistics footprint. However, Etsy (NYSE: ETSY) has found its place in the industry. It's a top choice for those consumers searching for unique, vintage, and handcrafted items.

Before investors consider buying this e-commerce stock, though, it's a smart move to take a closer look at Etsy's performance.

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Etsy shares have taken a turn for the worse

During the five-year stretch leading up to their peak, Etsy shares skyrocketed 2,160%. This was one of the hottest stocks on Wall Street.

It's been hard to watch since then, though. In the past five years, the stock has tanked 66% (as of Dec. 9). In the past one- and three-year periods, investors would've also lost money owning the business. That's very discouraging.

The S&P 500 has performed drastically better. The closely watched benchmark has produced a total return of 99% in the trailing five years. It has generated a positive total return in the past 12 and 36 months as well, running circles around Etsy.

Are Etsy's best days behind it?

Etsy's business was firing on all cylinders in the years before 2020. And the COVID-19 pandemic simply supercharged growth, as shoppers gravitated toward digital commerce at the expense of brick-and-mortar retail. Most observers would have agreed that Etsy looked like a solid business. All key metrics were trending in the right direction. The base of active buyers and sellers was expanding rapidly. It was very profitable and generating loads of free cash flow. And it benefits from a powerful network effect.

But it's been a completely different story in the past couple of years, as the fundamentals weakened dramatically. The company is struggling to grow. Gross merchandise sales on the Etsy marketplace totaled $2.4 billion in the third quarter (ended Sept. 30), down 2.4% year over year. And the operating margin of 12.2% is lower than in the same period of 2021. Etsy's costs are rising while activity on its marketplace is under pressure.

At the same time, the domestic e-commerce industry overall has done well. Total sales have steadily climbed in recent years. So, what's happening with Etsy can be a cause for concern. Maybe the discretionary nature of the platform is now a weakness as consumers are discerning with their spending.

On the one hand, the stock is reasonably valued, as it trades at a forward price-to-earnings ratio of 19.8. On the other hand, the market might be signaling that it has lost hope in the business. This pessimistic view might be warranted.

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