Motley Fool: Vintage, handmade profits
Etsy (Nasdaq: ETSY) operates an online marketplace for handmade and customizable goods. Sales are down and profits have shrunk, yet the company’s stock is worth considering now because its business model produces lots of cash.
In the fourth quarter, the number of active buyers on Etsy’s marketplace hit an all-time high of 92 million. Moreover, its base of active sellers is growing, providing those customers with more and more goods to buy. In other words, Etsy is still attracting the buyers and sellers it needs to succeed.
While gross merchandise sales have receded modestly, the company can still grow revenue in other ways. Etsy’s revenue was up 7% in 2023 thanks, in part, to advertising – and it generated $666 million in free cash flow in 2023 as well. The company hopes that artificial intelligence (AI) can give its sales a further boost, optimizing search results to match buyers with the products they’re seeking.
Etsy’s business model produces a lot of profit, too. In 2023, its gross profit margin was 70% and its net profit margin was about 11%.
Etsy’s stock appears inexpensive, with a recent forward-looking price-to-earnings (P/E) ratio of 20, well below its five-year average of 40. Shares are likely to be volatile in the years ahead, but risk-tolerant long-term investors might take a closer look. (The Motley Fool owns shares of and has recommended Etsy.)
Ask the Fool
Q. What does “split-adjusted” mean? – S.R., Yarrow Point, Washington
A. When you see a “split-adjusted” stock price, that means it’s been modified to reflect any stock splits that have occurred. Remember that a regular stock split will increase your number of shares but will also reduce the stock price proportionately, leaving your total investment valued the same. Splits are mostly an accounting exercise, not a sudden windfall.
Consider Microsoft, which was recently trading at a stock price near $420. That may seem like a big number, but it would be much bigger had Microsoft not split its stock nine times since it debuted on the market in 1986. If you had started with a single share, it would have been split 2-for-1 seven times and 3-for-2 twice, leaving you with 288 shares. But if the stock price had never dropped with each split, that one share would be worth more than $120,000 today.
Most historical stock prices you run across are split-adjusted (if there have been any splits). If you look up a company’s historical stock prices, you may see some very low old prices. Those will have been adjusted to reflect splits and dividends, permitting us to see the stock’s real change in value over time.
Q. If I open an account online with a brokerage, how do I get money into it so that I can buy stocks? – W.B., Swampscott, Massachusetts
A. If the brokerage has brick-and-mortar locations, you could walk into a branch with cash or a check. You can also deposit money electronically, such as via direct deposit, a wire or an electronic transfer from your bank account. You can learn more about good brokerages at our sister site, TheAscent.com.
My dumbest investment
My most regrettable investment move was an investment I didn’t make. A few years ago, my broker recommended a stock called Nvidia; I think it was trading for under $100 a share at the time. I didn’t know how to spell it and I sure didn’t know what it was, so I passed on it. I just purchased it last December at $481 a share! – Mark C., online
The Fool responds: Semiconductor titan Nvidia has specialized in chips for gaming, cloud computing, data centers and more, and it’s now focusing on artificial intelligence (AI) chips as well. But since you didn’t know anything about the company at the time, not buying was actually the right thing to do. It’s rarely smart to just buy stocks on someone’s recommendation without doing some research on your own to see what you think.
You reasonably regret not investing in Nvidia earlier, but it’s been such a powerhouse lately that you’ve almost doubled your money in just a few months, with the stock recently topping $900 per share. Right now its stock doesn’t seem to be bargain-priced (its recent price-to-sales ratio of 36.6 is well above its five-year average of 18.3). Still, in five years or more, risk-tolerant investors who buy this volatile stock now may be happy they did.
(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)