1 Former S&P 500 Stock Down 76% That History Suggests Buying at a Once-in-a-Decade Valuation

Etsy (ETSY) was recently removed from the S&P 500 following an 80% stock decline from its peak, yet the company exhibits a resilient business with substantial free cash flow generation and trades at a historically low price-to-free-cash-flow valuation below 14x, complemented by significant share buybacks reducing outstanding shares by 21% in three years. Despite its index removal, the stock is positioned for potential outperformance, supported by research suggesting S&P 500 removals often lead to market-beating returns over five years from undervalued levels. A key growth catalyst is Etsy's new, first-of-its-kind integration with ChatGPT, which could reignite user adoption that has recently flattened, mirroring how similar strategic moves helped eBay achieve a turnaround from a low valuation.

Analysis

Etsy (ETSY) was removed from the S&P 500 four years after its inclusion, following an 80% stock decline from its late 2021 peak, now trading 76% below its all-time high. Despite this significant price depreciation, the company has maintained a resilient business model, consistently generating substantial free cash flow. Shares currently trade at a price-to-free-cash-flow valuation of less than 14x, marking one of its lowest levels since going public a decade ago. Management has opportunistically reduced shares outstanding by 21% over the last three years through substantial buybacks, capitalizing on this perceived undervaluation.

Historical research by Rob Arnott suggests that stocks removed from the S&P 500, while initially underperforming, tend to outperform the market average by several percentage points annually over a five-year horizon. This pattern is often attributed to shares becoming excessively cheap due to institutional divestment and retail disappointment, creating a compelling entry point for long-term investors. Etsy's current valuation and recent index removal align with this historical precedent, indicating potential for future market-beating returns from its depressed levels.

A key challenge for Etsy has been the flattening of user adoption, with active buyers declining nearly 5% to 87 million in Q2 2025 from 96 million in 2021. However, a significant growth catalyst has emerged with Etsy's new integration with ChatGPT, allowing users to find and purchase products directly within the AI platform, a first for any e-commerce platform. This innovative partnership could reignite user growth, mirroring how eBay, despite modest revenue growth, saw its stock rise 141% over three years by reducing share count and eventually reporting improved growth, suggesting a similar turnaround potential for Etsy.

Key Decisions for Investors

• Consider Etsy (ETSY) for a long-term value play, given its historically low price-to-free-cash-flow valuation (below 14x) and management's aggressive share buybacks, aligning with historical patterns of S&P 500 removals outperforming over five years.
• Monitor the impact of the ChatGPT integration on active buyer growth and overall revenue trends, as this innovative partnership represents a critical catalyst for breaking out of recent underperformance and driving future growth.
• Evaluate the company's continued free cash flow generation and capital allocation strategies, as these fundamental strengths have supported the business's resilience despite recent stock market challenges.