Motley Fool: E-commerce platform Etsy for the win

Etsy (Nasdaq: ETSY) owns a family of e-commerce marketplaces. They’re led by the Etsy platform, which focuses on artisanal, vintage and often customizable goods, and has become the sixth-most-visited online marketplace in the world.

With over 115 million items on the marketplace, buyers can easily become overwhelmed. Etsy is tackling that problem by using artificial intelligence (AI) to personalize search results and rank them based on merchandise quality.

It aims to boost engagement by highlighting products buyers see as both relevant and well-made, thus increasing their confidence in Etsy and resulting in more buyers.

And the more buyers there are, the more sellers will be attracted to Etsy, too.

Etsy did report somewhat disappointing financial results in the second quarter, the worst of which was a slight decline in gross merchandise sales. But CEO Josh Silverman notes that AI “could unlock an enormous amount of growth” in the years ahead.

Currently, Etsy values its total addressable market (TAM) at $466 billion, but management says that figure could reach $2 trillion as e-commerce steals market share from traditional retailers.

And with shares recently trading at 3 times sales, a bargain compared to the three-year average of 10, this growth stock is worth consideration by long-term, risk-tolerant investors. (The Motley Fool owns shares of and has recommended Etsy.)

Ask the Fool

Q. Are mutual funds safer to invest in than stocks? – B.B., Newton, Massachusetts

A. They can be. A mutual fund spreads its assets across a range of investments, such as stocks, bonds or cash.

That diversification can make it less risky than having your money in only a few holdings because if a holding that makes up 20% of your portfolio implodes, it will do more damage than if the holding was one of 200 in a mutual fund in which you’re invested.

Mutual funds come in all shapes and sizes, though, and some are riskier than others.

For most investors, low-fee, broad-market index funds, such as ones that track the S&P 500, are a terrific choice – offering solid long-term growth and reasonable risk. Riskier funds include those focused on a volatile industry or region and those that invest in derivatives or employ leverage.

If you choose to invest in individual stocks, you can reduce your risk by keeping up with their progress.

Q. I understand that when a company reports bad news, many investors might sell their shares. But who buys them? – G.R., Bellevue, Washington

A. Think of the stock market as an auction, where stocks trade at prices that buyers are willing to pay and sellers are willing to accept.

So if there’s some bad news out about the Home Surgery Kits Co. (ticker: OUCHH), many shareholders may sell.

The stock price will drop, because few people will want to buy shares at the pre-lawsuit price, believing the company is worth less.

As the price falls, at some point it will start to look attractive to some investors, who will buy.

My Smartest Investment

My smartest investment concerns retirement savings. Many years ago, I contributed the maximum annually to a traditional IRA – for a long time.

When the Roth IRA became available, I rolled over both my 401(k) account from a former employer and my previous IRA contributions into a new Roth IRA account, attracted by the prospect of tax-free withdrawals in retirement.

In that account, I invested in a well-regarded mutual fund and in technology stocks. I was a lot younger then and figured that if my account grew by 11% annually over the next few decades, I’d retire with more than $6 million – tax-free! – D.C.W., Valparaiso, Indiana

The Fool responds: Wow – $6 million is a great goal and would provide most of us with an extremely comfortable retirement.

Both Roth IRAs (which debuted in 1998) and Roth versions of 401(k) accounts (introduced later) are great ways to save for retirement.

As you know, contributions to traditional IRAs and 401(k)s allow you to exclude the amount of your contribution from taxation in the year of the contribution, treating your future withdrawals as taxable income.

Roth accounts, though, skip the upfront tax break and instead simply allow you to withdraw funds in the future tax-free.

Your expectations for 11% returns may have been too rosy, but even retiring with $3 million would be good.

Regularly adding money to tax-advantaged retirement accounts over many years is a powerful move.