The S&P 500 has been ripping higher, and it's now trading in record territory. This bullish fever hasn't applied to every business out there, unfortunately. Etsy (ETSY 0.16%) is one company that continues to struggle at winning over investors. This e-commerce stock is down 81% from its November 2021 peak. Does this mean it's a once-in-a-decade buying opportunity right now?

Hitting a slump

Etsy's business benefited greatly from the COVID-19 pandemic. People had extra cash, and they were looking to spend it online. The company reported 107% and 31% gross merchandise sales (GMS) growth in 2020 and 2021, respectively, demonstrating how much the platform was thriving during that time.

Things have calmed down tremendously since then. Etsy's growth has stalled as consumer behavior normalized, brick-and-mortar shopping bounced back, and macro headwinds came up.

The unfavorable situation has continued. In the third quarter, Etsy reported $2.9 billion of GMS, down 4.1% year over year. Management called out softer discretionary spending as a key factor affecting results. It's also not encouraging to see that Etsy's user base is shrinking. The number of active buyers and sellers declined on a year-over-year basis in the third quarter.

Perhaps the Federal Reserve's plan to lower interest rates going forward could provide Etsy with a much-needed demand boost. Time will tell. For what it's worth, the leadership team expects GMS to fall to low- to mid-single-digit percentages in the fourth quarter compared to Q4 2023.

Etsy's positive traits

It's hard to look past Etsy's latest challenges. But if you focus on the big picture, you'll easily find a business that still possesses very positive characteristics.

For starters, Etsy is consistently profitable. It has posted an average operating margin of 16.2% in the past five years, which clearly shows that it can generate healthy earnings throughout various macro backdrops. The fact that Etsy produces positive free cash flow also proves that it has developed a sustainable business model.

The company has an economic moat that protects it from competitors. Because it operates a massive two-sided marketplace, Etsy benefits from network effects. Its massive base of 96.7 million buyers is attractive to small merchants looking to sell their goods online. With 8.5 million sellers around the globe, Etsy also has a huge merchandise assortment for shoppers. The platform gets stronger as it grows.

Another factor that allows Etsy to stand out is that it's truly differentiated, which is essential to succeed in the cutthroat e-commerce industry, particularly against Amazon. "Etsy has items that I can't find anywhere else," is a statement that a notable 83% of buyers agreed to in a survey.

Compelling valuation

As of this writing, shares trade 81% off their peak from just over three years ago. So, the stock can be purchased at a forward price-to-earnings (P/E) ratio of just 12.9. In comparison, the broader S&P 500 trades at a multiple of 23, showcasing just how depressed Etsy's valuation has become. The market is clearly very pessimistic about the business.

It seems like patience in the investment community is hard to find these days, as the focus on achieving short-term gains becomes more prevalent. But Etsy looks like a stock that can reward the patient investor. If the business can get back to posting healthy growth, the valuation should start to rise, and the market will take notice. This seems likely as economic conditions improve.

While I'll stop short of saying that Etsy is a once-in-a-decade buying opportunity, the stock still looks like a worthy addition to a long-term investor's portfolio.