Etsy Inc

Etsy's second-quarter results included 7.5% growth in gross merchandise sales, or GMS, to $2.6 billion and revenue of $668 million (up 9.3%). Operating margin for the core marketplace rose 310 basis points to 18.7%, while take rate expanded 50 basis points to 25.9%.

Why it matters: These results reinforce our view that Etsy's renewed focus on its core artisan marketplace platform is improving the health of the business. Following the sale of noncore assets, Etsy's focus on app experience and artificial intelligence-driven search personalization is stabilizing buyer engagement. Active buyers grew sequentially by 350,000 to 87 million, while GMS per active buyer rose 2.8%. In our view, this growth in buyers (the first since 2023) shows that product enhancements and targeted social marketing are rebuilding engagement among lucrative users. Mobile app GMS accelerated to 12.5%, representing 47% of platform sales. We view the app's trajectory as a critical margin driver as app users exhibit 40% higher lifetime value and allow Etsy to curb its reliance on costly off-platform paid search channels.

The bottom line: We plan to raise our $70 fair value estimate for narrow-moat Etsy by a mid-single-digit percentage due to the time value of money and a stronger near-term GMS outlook. However, we see shares as pricey as the market overestimates immediate-term discretionary volume expansion. We project that Etsy's operating margin will expand to 20.5% by decade's end from 12.8% in 2025 on high-margin ad service growth and marketing leverage, with marketing spend as a share of sales declining 270 basis points to 29% by fiscal 2035. Etsy cut 12% of its workforce, largely in product and engineering, to streamline operations. While some savings will be reinvested, we think the leaner cost structure supports our forecast for selling, general, and administrative expenses and research and development to fall 220 and 110 basis points, respectively, to 9.3% and 14.5% of sales by 2035.

We have raised our fair value estimate for Etsy to $74 per share from $70, reflecting the time value of money and a stronger near-term gross merchandise sales outlook following better-than-expected second-quarter results. Core marketplace GMS grew 7.5%, while active buyers increased sequentially for the first time since 2023 and GMS per active buyer rose 2.8%, giving us greater confidence that investments in search, personalization, and the app are beginning to stabilize engagement. We modestly raise our near-term revenue expectations but make no material change to our long-term growth or profitability framework, as we continue to view Etsy’s recovery as dependent on continued buyer engagement, seller-services monetization, and expense leverage following the Depop divestiture.

Our top-line assumptions are anchored by 7.2% annual growth in gross merchandise sales, primarily driven by a 3.8% average annual increase in average order value per user. We believe management’s ongoing investments in AI-driven search and discovery, along with a rebound of consumer sentiment toward the midcycle of our forecast, will lift conversion rates and drive higher-quality traffic to the platform. As the firm capitalizes on its core marketplace ecosystem, we forecast the marketplace take rate to increase 120 basis points over fiscal 2025 to 18.2% by the end of our forecast period. Furthermore, we project seller services revenue to compound at an 8.5% annual growth rate, fueled by increased adoption and monetization of Etsy Ads. We view these monetization targets as achievable because artisans lack viable alternatives with comparable top-of-funnel traffic, prompting a heavy reliance on Etsy’s ecosystem, enabling the firm to drive higher ad penetration without fracturing its supply base.

We model operating margins to rise significantly, expanding from 12.8% to 20.5% by the end of the decade. In our view, this trajectory should begin materializing in fiscal 2026 following the divestiture of Depop, which management noted was a material drag, representing a 350-basis-point headwind to consolidated adjusted EBITDA. At the gross margin level, we expect 170 basis points of expansion as first-party advertising revenue (which we estimate carries a lucrative 70% operating margin) contributes the majority of overall seller services revenue growth.

Profitability is further supported by broad-based cost leverage. We expect sales and marketing expenses as a share of revenue to decline 270 basis points by the end of our forecast to 29%. This incorporates near-term relief from shedding Depop and longer-term efficiencies as a greater share of traffic shifts directly to the Etsy app, which is a key management priority to curb reliance on paid search and external advertising costs. Additionally, we expect product development as a share of sales to decline 110 basis points to 14.5% over the forecast horizon, as the firm scales its core platform and utilizes internal artificial intelligence to boost engineering productivity. Finally, we model selling, general, and administrative leverage of 220 basis points (to 9.3%), driven by reductions in corporate overhead, a streamlined focus on the core business following recent divestitures, and the natural benefits of platform scale.

We recently lowered our Morningstar Economic Moat Rating for Etsy to narrow from wide. While the firm’s core platform continues to benefit from a powerful network effect, our downgrade is driven by the unwinding of its “House of Brands” strategy. Historically, we believed Etsy possessed the ability to leverage its user base to successfully expand into adjacent retail verticals. However, the divestitures of its noncore assets, including the 2023 sale of Brazilian marketplace Elo7, the 2025 divestiture of Reverb, and the 2026 sale of Depop to eBay, prove that Etsy’s network effect is confined to its original handcrafted niche. Thus, we no longer think Etsy can generate excess economic returns over a 20-year horizon.

Despite the downgrade, we still believe Etsy’s marketplace benefits from strong network effects driven by buyer density, seller participation, and brand trust and forecast average returns on invested capital of nearly 31% over the next decade, above our estimated 9% cost of capital estimate. Buyers are drawn to Etsy’s unique assortment, while sellers value access to a high-intent audience that would be difficult to replicate independently. With global e-commerce expected to grow 7% annually through 2029, Etsy has ample opportunity to deepen share in categories where its differentiated supply stands apart from more commoditized platforms. This strength is reflected in Etsy’s growth, with core marketplace gross merchandise sales (GMS) more than doubling from $4.7 billion in 2019 to nearly $10.5 billion in 2025 and active buyers growing from 46 million to 87 million. While active buyers have contracted slightly from a pandemic-fueled peak of 92 million in 2023, the network remains healthy. Habitual buyers account for roughly 40% of total GMS despite representing just 7% of active buyers, up from 5% in 2019, while GMS per active buyer expanded from $104 to $121, underscoring deeper engagement across its core consumer base.

The demand-side liquidity is matched by a uniquely captive supply side. Etsy sellers are predominantly “micro-entrepreneurs,” with 89% operating solo and nearly 40% relying on their creative income to cover essential living expenses, fostering strong platform dependence. Roughly half sell exclusively on Etsy, and among those who cross-list, one-third generate most of their sales through Etsy. On the demand side, Etsy’s appeal centers on discovery, uniqueness, and human connection, with 81% of buyers saying it offers items they can’t find elsewhere. This algorithmic discovery and community-driven trust form a value proposition that is difficult to replicate.

Etsy’s pricing power reflects the strength of its network, with its take rate rising to 24.2% in 2025, from 16.5% in 2019. Growth has come not only from higher transaction fees, but also increased adoption of optional seller services like Etsy Ads. As competition for visibility has intensified, sellers have become more willing to pay for promotion, enabling Etsy to layer high-margin (estimated 70% operating margins) discovery tools onto its marketplace. While Etsy’s 24% take rate exceeds eBay’s 14%, it sits well below Amazon’s estimated 40%. Sellers remain engaged because Etsy provides access to 87 million high-intent, active buyers. In this context, Etsy’s take rate serves as an efficient customer acquisition fee, keeping sellers engaged despite lacking Amazon’s extensive fulfillment services. The resilience of this value proposition was demonstrated in April 2022 when a 30% hike in the core transaction fee led to only modest and temporary seller attrition as the active seller base dipped to 5.3 million in the second quarter of 2022 from 5.5 million in the first quarter, before recovering to 5.6 million by the end of 2025.

We also think Etsy’s trust layer reinforces the marketplace network. Low-quality supply and counterfeit-like goods can destroy a marketplace by degrading buyer trust. Etsy has taken steps to mitigate this. After the seller base swelled to 7 million in 2023 amid an influx of drop shippers, print-on-demand operators, and AI-generated merchandise, management spent much of 2024 using machine-learning tools to identify and remove roughly 1.4 million noncompliant storefronts. Importantly, this nearly 20% reduction in sellers did not result in a comparable decline in GMS or profitability, suggesting these sellers diluted the platform’s core value. To prevent future degradation, Etsy has strengthened its automated monitoring systems and implemented a mandatory, nonrefundable $15 shop-opening fee. We believe these measures help preserve marketplace quality, protect buyer trust, and mitigate brand dilution.

Etsy’s network strength is evident both in its ability to digitize fragmented offline channels like craft shows and farmers markets and its resilience against well-capitalized digital competitors. Despite offering far greater scale and convenience, Etsy has preserved the authentic, maker-driven ethos that keeps buyers and sellers engaged. This helps explain why Amazon Handmade, launched in 2015 to crush Etsy, remains a small niche within Amazon. We estimate its artisan base is only a fraction of Etsy’s 5.6 million sellers, while the category is too small to warrant meaningful investment from a company generating over $800 billion in annual GMV. Moreover, Amazon’s seller ecosystem is optimized for scale, standardization, and rapid fulfillment, making it a poor fit for artisans selling unique, made-to-order goods (30% of GMS). Likewise, consumers turn to Amazon for convenience, whereas Etsy’s appeal lies in serendipity and community trust cultivated over more than two decades.

Similarly, platforms competing on price without defending trust tend to fail, Wish's deep-discount, unbranded model became synonymous with poor quality and long shipping times, and its valuation collapsed from a $14 billion IPO in 2020 to a sub-$200 million sale less than four years later.

The divestitures of Reverb and Depop could yield greater-than-anticipated cost savings, accelerating free cash flow generation and operating margin recovery above our estimates.

Seller services, which were roughly 30% of revenue in 2025, could compound faster than we forecast if enhanced traffic quality drives higher Etsy Ads adoption and monetization.

AI-driven search enhancements, recommendations, and marketing could lift conversion rates and drive higher customer reactivation as these shoppers spend 40% more than a first-time buyer.

With roughly 85% of GMS concentrated in six categories and buyers purchasing only about three times per year, Etsy could remain a low-frequency destination, capping GMS per buyer.

Reliance on Google and other platforms for social discovery could deepen, and algorithm changes may increase acquisition costs or reduce visibility, pressuring GMS and off-platform ad return on investment.

Persistent macroeconomic headwinds could accelerate active buyer churn, shrinking Etsy’s core user base and stalling transactions to a higher degree than we forecast.