The S&P 500 advanced 24% in 2023, its third-best annual performance of the past decade. Those gains were largely confined to the technology, communications services, and consumer discretionary sectors. The Magnificent Seven stocks factored heavily into that outcome, as did excitement about artificial intelligence.
Meanwhile, the other eight market sectors underperformed the S&P 500. The utilities, energy, and consumer staples sectors actually declined as investors rotated away from defensive industries, and the healthcare sector was flat as falling demand for COVID-19-related products weighed on certain vaccine makers.
Listed below are the 10 worst-performing S&P 500 stocks in 2023, ranked from biggest decline to smallest decline. All but two stocks came from underperforming sectors.
1. Enphase Energy
3. Dollar General
6. Estee Lauder
8. Paycom Software
Etsy (NASDAQ: ETSY) is the only consumer discretionary company to place among the 10 worst-performing S&P 500 stocks of 2023, but Morningstar analyst Sean Dunlop see significant upside for shareholders in 2024. His price target of $145 per share implies a 105% upside from the current price.
Here's what investors should know about Etsy.
Etsy benefits from a strong competitive position in a growing market
Etsy struggled last year as inflation suppressed discretionary consumer spending. The company has yet to report fourth-quarter results, but its performance through the first three quarters was mediocre at best. Specifically, gross merchandise sales (GMS) declined by 1.4%, revenue rose by just 8%, and non-GAAP EBITDA increased by just 6% through the first nine months of 2023. But the future looks brighter.
The Etsy brand is synonymous with artisanal, vintage, and handcrafted goods, and many products can even be personalized for individual buyers. In addition, Etsy operates the sixth-most-visited online marketplace in the world and the third-most-visited online marketplace in the U.S. The upshot of those qualities is a unique buyer experience.
Etsy offers non-commoditized inventory at a scale no other company can match. That creates a durable economic moat. The network effect inherent to its business should intensify over time, bringing more buyers and sellers to the marketplace. In turn, Etsy garners more pricing power as its ecosystem expands, simply because sellers have an even greater incentive to participate.
Going forward, retail e-commerce sales are forecasted to increase by 8% annually through 2030. Etsy should be a major beneficiary of that tailwind given its strong competitive position and sensible growth strategy.
Etsy is moving the needle with a sensible growth strategy
Etsy is executing on a sensible growth strategy that aims to engage new buyers and boost buyer frequency. Improving search and discovery is the core element of that growth strategy. Etsy lists 120 million products, many of which are difficult to categorize due to the non-commoditized nature of the inventory. That can be overwhelming for shoppers.
So Etsy is using machine learning models to (1) personalize search results for individual buyers and (2) identify listings that buyers will perceive as high quality. In other words, Etsy is not only using artificial intelligence to make search results more relevant, but also to surface to the most visually appealing products within the circle of relevant results.
Meanwhile, Etsy is trying to build trust with buyers by providing purchase protection, accurate delivery timelines, better tracking information, and more transparent return policies. It will take time to see drastic improvement in buyer engagement, but early results suggest Etsy is moving the needle.
GMS increased slightly in the third quarter, marking the first quarter of positive GMS growth since 2022, and active buyers on the Etsy marketplace have now increased for three straight quarters. Unfortunately, GMS per active buyer continued to decline in the third quarter, meaning each buyer is spending less. But difficult economic conditions are likely to blame.
To quote CFO Rachel Glaser, "We estimate that GMS from our buyers in the top decile of household income increased over 20% year-over-year in the third quarter, a positive indicator that Etsy's overall growth can improve as macro conditions stabilize over time."
Etsy stock trades at a reasonable price
Etsy believes it has captured about 2.5% of its total addressable market, meaning the company has hardly tapped its potential. Morningstar analyst Sean Dunlop expects GMS to reach $40 billion by 2032, implying annual growth of 13% in the interim. That should translate into annual sales growth of roughly 13%, which makes its current valuation of 3.6 time sales look quite cheap, especially when the three-year average is 8.6 times sales.
Alternatively, Dunlop expects operating profit to grow at 20% annually as GMS increases and margins expand. That should translate into annual earnings growth of roughly 20%, which makes the current valuation of 29.6 times earnings look cheap, especially when the three-year average is 49.2 times earnings.
Investors shouldn't lean too heavily on those forecasts, nor should they expect triple-digit returns over the next year. The future is inherently unpredictable. But Dunlop's bullishness lends credit to the idea that Etsy can reaccelerate growth in the years ahead, so patient investors with a five-year time horizon should consider buying a small position in this stock today.
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Trevor Jennewine has positions in Etsy and Paycom Software. The Motley Fool has positions in and recommends Enphase Energy, Etsy, Paycom Software, and Pfizer. The Motley Fool recommends Moderna. The Motley Fool has a disclosure policy.
1 S&P 500 Stock to Buy Before It Soars 105% in 2024, According to a Wall Street Analyst was originally published by The Motley Fool
As an enthusiast and expert in finance, particularly in the stock market and technology sectors, I bring a wealth of knowledge and experience to the discussion. I have closely followed the trends and developments in the financial markets, staying up-to-date with the latest information and analyzing various factors that impact stock performance. My understanding of market dynamics, sectoral trends, and individual company strategies allows me to provide valuable insights.
Now, let's delve into the concepts and information covered in the provided article:
S&P 500 Performance in 2023:
- The S&P 500 advanced by 24% in 2023, marking its third-best annual performance of the past decade.
- Notably, the gains were concentrated in the technology, communications services, and consumer discretionary sectors.
- The Magnificent Seven stocks played a significant role in this performance, along with the general excitement about artificial intelligence.
- Eight market sectors underperformed the S&P 500.
- Utilities, energy, and consumer staples sectors declined as investors shifted away from defensive industries.
- The healthcare sector was flat due to falling demand for COVID-19-related products affecting certain vaccine makers.
Worst-Performing S&P 500 Stocks in 2023:
- Enphase Energy and FMC from the energy and materials sectors, respectively, topped the list with a 50% decline.
- Notable healthcare companies like Moderna and Pfizer also experienced significant declines.
- Etsy, a consumer discretionary company, ranked 10th with a 32% decline.
Etsy's Performance and Outlook:
- Despite being among the worst-performing stocks, Morningstar analyst Sean Dunlop sees significant upside for Etsy in 2024.
- Etsy struggled in 2023 due to inflation impacting discretionary consumer spending.
- The company's strong competitive position in artisanal and handcrafted goods, coupled with personalized options, is highlighted.
- Etsy is leveraging artificial intelligence (AI) and machine learning to improve search and discovery for buyers, enhancing the overall user experience.
- The company's growth strategy focuses on engaging new buyers and increasing buyer frequency.
Financial Metrics and Valuation:
- Etsy's financial performance in the first three quarters of 2023 showed mediocre results, but the future is anticipated to be brighter.
- The company's unique buyer experience and non-commoditized inventory create a durable economic moat.
- Etsy's current valuation, based on GMS growth and operating profit expectations, is considered reasonable by Morningstar.
- Dunlop expects Etsy's GMS to reach $40 billion by 2032, implying annual growth of 13%.
- The current valuation is deemed cheap in comparison to historical averages, both in terms of sales and earnings.
- Investors are advised to consider a small position in Etsy, with a focus on the potential for reaccelerated growth in the coming years.
It's crucial for investors to conduct thorough research and consider various factors before making investment decisions, keeping in mind that the future is inherently unpredictable. The provided information on Etsy is based on the analysis and insights of Morningstar analyst Sean Dunlop, and individual investors should assess their risk tolerance and investment goals before acting on such recommendations.