Etsy Inc. (NASDAQ: ETSY) gapped higher in early February on news that Marc Steinberg, a partner at Elliott Investment Management, had taken a seat on the online retailer's board. 

Steinberg is also on the board of Pinterest Inc. (NYSE: PINS), of which Elliott is also a shareholder. 

According to reports, Elliott has amassed a 13% stake in Etsy, whose stock is down 48.22% in the past year. 

Elliott is now the largest Etsy shareholder.

In a release, Steinberg said, "I am looking forward to working with the Board and supporting Josh and the team as they execute on initiatives to improve the customer experience, accelerate top-and bottom-line growth, and drive long-term value."

Etsy stock fizzled out in 2022

Etsy's growth has stalled, which has sent the stock lower relative to high-flying AI-related technology stocks. 

If you look at the Etsy chart, you'll see the stock had a strong run-up between March 2020 and November 2021, as its business model of selling artisan-made goods and other unique products was a perfect fit during the pandemic. 

Earnings increased sharply in 2020 and 2021, but things began cooling off in 2022 as revenue slowed and year-over-year earnings declined. 

Not only had the pandemic online buying craze waned, but inflation and higher interest rates took a bite out of Etsy sales. In addition, Etsy's top-selling product categories include crafts and supplies, jewelry and downloadable files. Consumers could either postpone purchases, find cheaper alternatives or make their own goods to serve their needs. 

The commitment from Elliott, one of the largest activist managers, shows that deep-pocketed investors see potential for Etsy stock to turn around the weak performance.

Etsy's strengths include:

• Unique product offering: Etsy's platform offers a range of handmade, vintage, and craft supplies. The appeal is to consumers seeking one-of-a-kind items.
• Support for independent sellers: The Etsy platform allows individual artisans and small businesses to reach a broader audience, giving them a platform to showcase their creations.
• Community: Etsy strives to develop a sense of community among buyers and sellers, encouraging interaction and feedback. That drives more engagement on the platform. 
• Personalization and customization: The platform allows buyers to easily discover products tailored to their specific preferences.

According to reports, Etsy has been in discussions with Elliott for several months. And the 13% stake didn't happen overnight; it takes months for an institutional investor to accumulate a significant position in a stock.

Cost cutting and layoffs

Etsy began to refocus on its performance in 2023 with an announcement that it was slashing jobs in a bid for efficiency. In December, the company said it would lay off 225 employees.

"While the Etsy marketplace is still more than double the size it was in 2019, we need to acknowledge and adjust for today's realities," CEO Josh Silverman said in a release.

"We are operating in a very challenging macro and competitive environment, and gross merchandise sales has remained essentially flat since 2021," he added. "This means we are not bringing our sellers more sales, which is the single most important thing we can do for them."

Silverman said employee expenses had grown, which was not a sustainable trajectory. 

Following in Shopify's path

Etsy is following in the footsteps of fellow e-commerce retail specialist Shopify Inc. (NYSE: SHOP), which cut costs, largely through layoffs, earlier in 2023. There's been a considerable divergence in the performance of the two companies, with Shopify advancing 58.15% in the past year. 

Wall Street seems optimistic that Etsy can see a rebound in growth. Etsy analyst forecasts show a consensus price target of $91.96, an upside of 25.27%. That would bring the price back to August 2023 levels. 

Following the gap-up after the announcement about the Elliott stake, the stock finished the week ended February 2 with a gain of 8.87%. 

Shares have been selling off gradually the week of February 5, but the view here is longer term; you aren't likely to see this stock take off like a rocket in the next few weeks. Instead, it will take months to see improvement in revenue growth that translates to stock price appreciation.