Executive Summary / Key Takeaways

• Strategic Pivot Bearing Fruit: Etsy's deliberate shift from short-term GMS optimization to holistic customer experience improvements, powered by AI and an app-first strategy, is showing early signs of success, with Q2 2025 GMS declines moderating and app engagement increasing.
• Technological Moat Deepening: Significant investments in AI and Machine Learning, particularly Large Language Models (LLMs), are enhancing personalization, search quality, and discovery, aiming to transform Etsy into a "made-for-you shopping journey" and a leader in agentic commerce.
• Depop as a Growth Catalyst: The Depop fashion resale marketplace is a standout performer, with GMS accelerating by 35% year-over-year in Q2 2025, reaching an annualized run rate of $1 billion, and is a key focus for accelerated marketing investments.
• Financial Discipline and Flexibility: Despite GMS headwinds, Etsy maintains strong profitability with a Q2 2025 Adjusted EBITDA margin of 25.1% and robust free cash flow generation, enabling continued strategic investments and significant share repurchases.
• Outlook Signals Improvement: Q3 2025 guidance anticipates further sequential improvement in GMS trends, driven by compounding impacts of product and marketing initiatives, positioning Etsy for a potential return to growth in the latter half of the year.

The Human Touch in a Digital World: Etsy's Core Thesis

Etsy, Inc. (NASDAQ:ETSY) stands as a distinctive player in the vast e-commerce landscape, operating two-sided online marketplaces that champion "human commerce" by connecting millions of passionate buyers and creative sellers worldwide. Founded in 2005, Etsy has evolved from a niche platform for handmade goods into a global destination for unique and creative items, a journey marked by strategic transformations from 2017 to 2020 that invigorated growth and profitability. This foundational strength proved critical as the company navigated the extraordinary period from 2020 to 2024, maintaining substantial consumer scale even as active buyers more than doubled during the pandemic.

In an e-commerce environment increasingly skewed towards low prices and fast delivery, Etsy recognizes it cannot win a "race to the bottom." Instead, its core strategy is to double down on its differentiation: creativity, self-expression, and artisanal items, empowering a nimble base of micro-entrepreneurs. This contrasts sharply with the mass-market efficiency of giants like Amazon (AMZN), the broad transactional nature of eBay (EBAY), or the general home goods focus of Wayfair (W). While Shopify (SHOP) provides tools for merchants, it lacks Etsy's integrated marketplace and built-in buyer-seller network. Etsy's competitive edge lies in fostering a community-driven ecosystem, emphasizing authenticity and unique value, which resonates deeply with its discerning customer base. The recent divestiture of Reverb Holdings, Inc. on June 2, 2025, for $105 million, underscores Etsy's sharpened focus on its core marketplace and the high-growth Depop segment.

Technological Alchemy: Fueling Discovery and Personalization

Etsy's strategic pivot in mid-2024, shifting product development from near-term GMS conversion to holistically better customer experiences, is deeply rooted in advanced technological differentiation. The company is leveraging Artificial Intelligence (AI) and Machine Learning (ML), particularly Large Language Models (LLMs) and generative AI, to fundamentally transform the buyer and seller experience.

The mobile app is central to this strategy, serving as the "key to our flywheel." Etsy's app is now "markedly better, more intuitive, more inspiring and a lot more browsable." This focus is yielding tangible results: App GMS grew year-over-year in Q2 2025, rising to nearly 45% of total Etsy GMS, a 3 percentage point increase from a year ago. Monthly active users on the app increased by 7% year-over-year. Management estimates that aligning Etsy's app penetration with its peers could unlock "up to a billion dollar GMS opportunity." This improved app experience is designed to make Etsy a "source for discovery and inspiration early, not just at the end of your journey when you're ready to buy."

Etsy is harnessing buyer insights to deliver "more personalized content via owned marketing channels, including e-mail and push notifications," which are becoming increasingly powerful drivers of customer connectivity. Attributed GMS from these channels grew by one-third year-over-year in Q2 2025. In Q2, approximately 40% of these communications were personalized, with a target to tailor "nearly every one of these communications" to each buyer by year-end. Personalized homepages already achieve "nearly double the engagement of non personalized homepages."

The company is "retooling our ranking platform to more effectively leverage capabilities of LLMs in generative AI," allowing for a deeper understanding of listings and user activity. This aims to deliver "better search results" and "more diverse and engaging recommendations by scoring items across a very broad range of interests and clustering them to capture nonobvious connections to encourage discovery." This approach has proven highly successful at Depop, where buyer recommendations have doubled their share of purchases since the end of 2022.

Furthermore, Etsy introduced a "quality score" into its search algorithms in 2024, incorporating indicators like positive reviews and on-time shipping to surface higher-caliber listings. This initiative is fostering a "race to the top dynamic" among sellers, leading to an increase in four and five-star buyer reviews and a decrease in lower-rated reviews and refund requests. In 2025, this quality score will become "more dynamic and robust," with ongoing tests of LLMs to identify "skills and level of craftsmanship" in items. Sellers are actively responding to guidance, with over 2.5 million items seeing lowered shipping charges to meet buyer expectations.

Etsy is also uniquely positioned to benefit from "agentic shopping" due to its "massive set of unique and highly differentiated inventory." Third-party data already identifies Etsy as "one of the top retail e-commerce recipients of agentic chatbot traffic," and its feature in Apple's (AAPL) 2025 Worldwide Developers Conference for visual intelligence integration further validates its technological relevance. These technological advancements are not merely incremental; they are foundational to Etsy's competitive moat, enabling it to offer a truly unique and personalized shopping experience that commoditized competitors struggle to replicate, thereby driving engagement, loyalty, and long-term GMS growth.

Financial Resilience Amidst Strategic Evolution

Etsy's financial performance in Q2 2025 reflects both ongoing macroeconomic pressures and the early impacts of its strategic shifts. Consolidated Gross Merchandise Sales (GMS) for the quarter were $2.81 billion, a 4.8% year-over-year decline. However, excluding the divested Reverb, GMS was down 2.6% year-over-year, a notable improvement from the 6.2% decline (ex-Reverb) seen in Q1 2025. This moderation signals "healthier trends at Etsy" and an acceleration in Depop's growth.

Total revenue for Q2 2025 increased by 3.8% year-over-year to $672.7 million. This growth was primarily driven by a robust 15.3% year-over-year increase in Services revenue, largely from a 12.7% rise in on-site advertising revenue due to improved ad relevancy and higher average price per click on Etsy Ads. Marketplace revenue saw a slight decrease of 0.5% year-over-year, impacted by lower transaction fees from GMS declines, but partially offset by growth in payments revenue (up 2.4%) and the expansion of the seller set-up fee. The consolidated take rate for Q2 2025 expanded by 200 basis points year-over-year to 24.0%, reflecting the value generated from these services.

Profitability remained strong, with Adjusted EBITDA at $169.0 million, representing a 25.1% margin. While this was a 260 basis point decline year-over-year, it reflects increased marketing investments (up 16% year-over-year to $212 million) focused on performance marketing and paid social, which management views as "sensible and opportunistic." The core Etsy business is managed to "high 20% range" Adjusted EBITDA margins, demonstrating continued discipline.

Etsy maintains a robust liquidity position, with $1.40 billion in cash and cash equivalents and short-term investments as of June 30, 2025. The company also has access to a $400 million revolving credit facility, which remains undrawn. In June 2025, Etsy strategically issued $700 million in 1.00% Convertible Senior Notes due 2030, enhancing its financial flexibility. Concurrently, it repurchased $150 million of common stock, part of a broader $1 billion repurchase program, signaling management's conviction in the company's valuation. Etsy's capital-light business model continues to generate strong free cash flow, with $90 million in Q2 2025 and $635 million over the trailing 12 months, converting approximately 90% of Adjusted EBITDA to free cash flow.

Depop's Ascendance: A Growth Engine

Within Etsy's house of brands, Depop has emerged as a significant growth engine. The fashion resale marketplace delivered an "excellent quarter" in Q2 2025, with GMS growth accelerating to 35% year-over-year, reaching an impressive annualized run rate of $1 billion. Its U.S. GMS growth was particularly strong, up 54% year-over-year, positioning Depop as the "fastest-growing player in this large online fashion resale market and by a wide margin."

Depop's success is attributed to its app-first experience, where over 90% of sales occur, and its sophisticated recommendation engine that deeply understands buyer tastes. Strategic fee changes in July 2024, which removed U.S. selling fees and introduced a buyer marketplace fee, have made Depop more appealing to sellers, leading to a 26 percentage point acceleration in U.S. listing growth. The appointment of Peter Semple as permanent Depop CEO further solidifies leadership for this high-potential segment, which is now receiving accelerated marketing investments to drive brand awareness.

Outlook: A Path to Re-Acceleration

Etsy's outlook for Q3 2025 signals continued sequential improvement in its growth trajectory. The company expects consolidated GMS to be between $2.6 billion and $2.7 billion. At the midpoint, this represents a further quarter-over-quarter improvement in the apples-to-apples growth rate, building on the momentum seen in Q2. This guidance is underpinned by the "compounding impacts from our product and marketing investments" and an assumption of a "relatively stable macroeconomic environment."

The consolidated take rate for Q3 2025 is projected to be approximately 24.5%, maintaining the strong expansion achieved. Adjusted EBITDA margin is expected to be around 25%, reflecting a strategic balance of maintaining strong profitability in the core Etsy business while accelerating investments in Depop. Management's rebalanced 2025 product development plan aims to accelerate "near-term GMS driving initiatives" alongside ongoing longer-term priorities, leveraging the foundational improvements made in 2024. This disciplined, ROI-driven investment approach, coupled with easier year-over-year comparisons in the second half of 2025, is expected to position the Etsy Marketplace for improved GMS performance beyond Q1.

Navigating Headwinds: Risks and Competitive Dynamics

Despite its strategic advancements, Etsy operates within a dynamic and challenging environment. Macroeconomic uncertainty, including inflation and fluctuating consumer discretionary spending, remains a significant headwind. The company acknowledges that consumer purchases of discretionary items generally decline during periods of economic uncertainty.

The evolving landscape of tariffs and trade barriers, particularly changes to "de minimis" exemptions, presents both risks and potential opportunities. While the "One Big Beautiful Bill Act" (OBBBA) enacted July 4, 2025, will eliminate de minimis exemptions for commercial goods imported into the U.S. from all countries starting July 2027, the immediate impact on Etsy is expected to be minimal. Only about 1% of Etsy's GMS comes from U.S. imports from China, and management anticipates a high replacement rate from other sources if prices become unaffordable. This contrasts with many competitors who may face significant price increases due to higher reliance on Chinese imports, potentially positioning Etsy as a net beneficiary. However, broader changes to de minimis exemptions globally could impact the speed and cost of cross-border trade, which is vital for Etsy's international sellers.

Competition remains intense across all fronts. Etsy competes for sellers with broad marketplaces like eBay and specialized platforms, and for buyers with e-commerce giants like Amazon, which offers convenience and speed, and social commerce channels like TikTok Shop. Etsy's competitive response is to lean into its unique value proposition: offering items that are "special and unique rather than cheap and deals." Its technological investments in personalization, quality, and app experience are designed to deepen this differentiation. In Q2 2025, Etsy's GMS performance in 5 out of 6 top categories was in line with or better than its pure-play U.S. peers, indicating its ability to hold its own in key segments. Operational risks, including fraud, technology disruptions, reliance on third-party services, and talent retention, also remain pertinent.

Conclusion

Etsy is at a pivotal juncture, consciously choosing a path of differentiated growth by focusing on its unique value proposition in a commoditized e-commerce world. The company's strategic pivot towards AI-driven personalization, an enhanced app experience, and a relentless focus on quality is not merely a response to market pressures but a proactive effort to deepen its competitive moat. While the "opportunity cost" of these foundational investments has impacted near-term GMS, the early signs of moderating declines and increasing app engagement suggest these efforts are beginning to bear fruit.

With Depop providing a strong growth tailwind and the core Etsy marketplace poised for re-acceleration through compounding product and marketing initiatives, the company's outlook is cautiously optimistic. Supported by robust financial health and a disciplined capital allocation strategy, Etsy is well-positioned to leverage its technological leadership and unique seller ecosystem to drive sustained long-term growth and shareholder value, proving that in the digital age, the human touch, amplified by intelligent technology, can indeed be a powerful differentiator.