1 Former S&P 500 Stock Down 82% That History Suggests Buying at a Once-in-a-Decade Valuation

Core Viewpoint - Etsy, despite being removed from the S&P 500 index, is positioned for potential outperformance due to its unique product offerings, strong cash generation, and significant share repurchases [1][4]. Group 1: Company Performance and Growth - Etsy has experienced annual sales and free cash flow (FCF) growth of 36% and 42% respectively since 2017, driven by its unique, often personalized goods [6]. - The company's market capitalization has decreased from over $30 billion to around $6 billion due to a slowdown in sales growth post-pandemic [7]. - Etsy's FCF is now 11 times higher than it was in 2017, indicating a stronger business foundation [8]. Group 2: Financial Metrics and Valuation - Etsy boasts a cash return on invested capital (ROIC) of 40%, which is competitive among S&P 500 stocks and suggests future outperformance [9]. - The company has a robust FCF margin of 25% and has reduced its share count by 9% over the last three years through share buybacks [10]. - Currently, Etsy's FCF yield stands at 9.6%, the highest level in the last decade, and trades at 15 times FCF, making it approximately half as expensive as the average S&P 500 stock [13]. Group 3: Strategic Initiatives - Management is focusing on enhancing the mobile app experience, with only 45% of buyers currently using it, compared to higher adoption rates for competitors like Amazon [11]. - Increasing mobile app penetration could significantly boost purchase frequency, as mobile app users generate 75% more purchase days [12]. - Minor improvements in mobile app usage or search experience could lead to rapid growth, enhancing Etsy's valuation [14]. Group 4: Historical Context and Future Outlook - Historical data suggests that stocks removed from major indexes often outperform the market by five percentage points annually over the following five years [2][3]. - Etsy's current valuation presents a unique investment opportunity, as the company has matured into a significant cash-generating entity [15].