S&P 500 fell Etsy. 3 reasons why you shouldn’t.

The S&P 500 recently completed its latest quarterly rebalancing, a move to ensure the benchmark is serving its purpose — showcasing the performance of the top 500 companies driving today’s economy. This generally involves removing certain members and adding new ones. In the most recent reshuffle, the S&P 500 dropped an e-commerce stock that soared in the early days of the pandemic.

I’m talking about Etsy (ETSY -0.14%)an online marketplace that connects makers of handmade products with buyers. Shoppers flocked to the platform during the lockdowns, but Etsy has recently faced the headwinds of greater competition from brick-and-mortar stores and pressure on the consumer’s wallet. That’s weighed down by growth and stock performance — the stock is down 36% this year.

But before you consider following in the footsteps of the S&P 500 and ditching Etsy, it’s important to note that the move doesn’t reflect a loss of confidence in the company. Instead, it’s a reflection of Etsy’s situation in terms of size. The company’s market capitalization has fallen from a high of more than $35 billion to about $5.8 billion today, making it a better fit for the S&P SmallCap 600 — the company entered that benchmark when it exited the S&P 500.

Now let’s consider three reasons why you should buy this smaller but still promising player.

Image source: Getty Images.

1. Consumers still love Etsy

Higher inflation has affected the purchasing power of consumers, pushing them to prioritize essentials and forgo many of their non-essential purchases. This has affected Etsy’s buyer growth, but it’s important to remember that the company still has an impressive level of regular and active buyers — and the retention rate remains strong.

Regular shoppers are those who have purchased on at least six days and spent at least $200 in the past 12 months, while active shoppers have made at least one purchase in the past 12 months. In the most recent quarter, Etsy’s regular buyers were 6.9 million, active buyers reached 91.5 million, and the company acquired 12 million new and reactivated buyers. The company’s active buyer retention rate remains above pre-pandemic levels, and its regular buyer retention rate has improved year over year.

Additionally, Etsy is launching a paid program with benefits — Etsy Insider — in beta to a small audience this fall, a move that could build loyalty.

This strong connection with buyers should help drive growth at Etsy as consumer purchasing power strengthens and lead to earnings over time.

2. A smart business model

Etsy has a low-capital business model, which means it doesn’t need to make major capital investments in, for example, shipping and warehousing goods. The company gives sellers a platform to sell their products — but those sellers handle all the logistics, from stocking the items to delivering them to customers.

This means Etsy can focus its investments on areas to promote sales, such as marketing and using artificial intelligence (AI) to make its platform more efficient for sellers and buyers. He is currently working on AI for conversational search, fraud detection, and many other uses.

Etsy’s lean business model, by limiting expenses, supports a healthy balance sheet. The company has more than $1 billion in cash — and is able to turn 90% of adjusted EBITDA into free cash flow on a trailing 12-month quarter.

This business model has helped Etsy stay strong through tough times and should help the company grow faster as the economic environment improves.

3. Etsy is cheap right now

Today, Etsy trades for about 11 times forward earnings estimates, down from more than 17 earlier this year. This looks like a bargain given the two points I mentioned above, as well as Etsy’s growing investments today — like its new loyalty program — and its ability to deliver profitability. In the quarter, Etsy’s adjusted EBITDA of about $179 million was 28% higher than the company’s expectations.

Etsy may take some time to really bounce back and move forward as it will take time for consumer purchasing power to improve. But that’s okay. The best way to invest is for the long term, and that means buying a stock at an interesting price and potentially benefiting as it progresses through its growth story. And that’s why now is a great time to buy — or hold, if you’re already a shareholder — Etsy and set yourself up for potential long-term gain.