Executive Summary / Key Takeaways

• Etsy is undergoing a strategic transformation, leveraging AI and an app-first approach to enhance personalization and drive growth in its unique, human-centric commerce model, distinguishing itself from commoditized e-commerce platforms.
• The company's third-quarter 2025 results surpassed expectations, with consolidated Gross Merchandise Sales (GMS) returning to year-over-year growth, fueled by Depop's robust performance (GMS up 39.4% year-over-year) and sequential improvements in the core Etsy marketplace.
• Key strategic initiatives include significant investments in the Etsy app, which now accounts for 46% of total GMS, utilizing advanced AI for deeper buyer and item understanding, and reallocating marketing spend towards digital and social channels.
• A leadership transition is underway, with Kruti Patel Goyal appointed CEO effective January 1, 2026, succeeding Josh Silverman, who will become Executive Chair, signaling a renewed focus on AI-driven personalized shopping experiences.
• While the fourth-quarter 2025 guidance projects further sequential GMS improvement, increased brand marketing investment in Depop is expected to compress margins. Macroeconomic uncertainty, evolving tariff landscapes, and intense competition remain pertinent risks for investors to monitor.

The Human Touch in a Digital World: Etsy's Differentiated Marketplace

Etsy, Inc., founded in 2005, has cultivated a unique position in the e-commerce landscape as the global destination for creative and unique goods, driven by its mission to "Keep Commerce Human." This core philosophy underpins its two-sided online marketplaces, connecting millions of passionate buyers and sellers worldwide. In an industry increasingly dominated by platforms prioritizing low prices and rapid delivery, Etsy deliberately carves out a niche focused on creativity, self-expression, and artisanal items. This strategic differentiation is crucial in a competitive environment where larger players often commoditize products.

The e-commerce industry is characterized by intense competition from a diverse array of online and offline entities. Etsy faces rivals such as eBay (EBAY), Amazon (AMZN), and Shopify (SHOP), each with distinct strengths. eBay, a global marketplace, benefits from vast network effects and established brand recognition, though it often lacks the tailored experience for handmade goods that Etsy provides. Amazon, a colossal e-commerce and technology conglomerate, boasts rapid revenue growth, extensive logistics, and advanced data analytics, posing a significant challenge through its scale and efficiency. Shopify empowers merchants with customizable platforms, demonstrating strong revenue growth from subscriptions and merchant services.

Etsy's competitive advantages stem from its strong network effects, a loyal community brand, and proprietary tools designed for sellers. The interconnected ecosystem of buyers and sellers fosters higher customer loyalty and recurring revenue, enhancing Etsy's pricing power in niche segments. This community-centric approach allows Etsy to differentiate from eBay's broader reach and Amazon's mass-market efficiency. However, Etsy's smaller scale and potential technological gaps compared to these giants represent vulnerabilities. Its reliance on transaction volumes, for instance, can make it more susceptible to market fluctuations than Shopify's subscription-based stability. Barriers to entry in this sector, primarily network effects and brand recognition, help Etsy defend its position but also reinforce the advantages of scaled competitors.

Technological Edge: AI as the Artisan's Ally

Etsy's strategic pivot towards an app-centric, discovery-driven experience is deeply intertwined with its technological advancements, particularly in artificial intelligence (AI) and machine learning (ML). The company is "harnessing AI to further personalize and transform the shopping experience in ways that were previously unimaginable." This commitment to AI is foundational to Etsy's ability to differentiate itself in a commoditized market.

At its core, Etsy's technology focuses on enhancing "buyer understanding" and "item understanding." New ML models, leveraging emerging Large Language Model (LLM) techniques, are designed to interpret users' interests more deeply. This allows Etsy to move beyond basic listing-to-listing personalization to understanding a buyer's unique style and preferences, even connecting them with items in entirely different categories they might love. For sellers, AI-powered tools are being introduced to streamline tasks like generating listing titles and drafting buyer messages, aiming to help sellers "spend less time managing and more time creating." These tools boost efficiency, allowing artisans to focus on their craft, which is central to Etsy's unique value proposition.

A significant technological differentiator is Etsy's "quality score," introduced in 2024 and set to become more dynamic and robust in 2025. This score incorporates indicators like positive reviews and on-time shipping into search algorithms, aiming to surface items buyers will "truly love" rather than just those they are "most likely to buy." The company is also testing an LLM that identifies the "skills and level of craftsmanship that goes into an item," a capability that was not possible even three years ago. This allows Etsy to identify and elevate genuinely artisanal products, reinforcing its brand identity.

The app is a critical component of this technological strategy, described as "key to our flywheel." In Q3 2025, app GMS significantly outperformed non-app GMS by 13 percentage points and contributed 46% to total GMS. App users visit five times more often and view three times more pages per visit, leading to higher conversion rates. This increased engagement provides an "order of magnitude more data" about buyer interests, inclinations, and habits, which then fuels more powerful ML models and LLMs. This richer data enables more refined and personalized experiences, transforming the app into a "personal boutique" for each user.

Etsy's early engagement with agentic commerce platforms, such as its partnership with OpenAI for instant checkout through ChatGPT, further highlights its technological foresight. This integration allows users to purchase items directly through ChatGPT, with Etsy processing payments and ensuring its brand visibility. Management views this as an opportunity for Etsy to be presented as a unique alternative to mass-produced goods, leveraging its differentiated inventory in a growing high-intent discovery channel. This proactive stance in emerging AI-driven commerce channels positions Etsy to shape the future of online shopping rather than merely reacting to it.

Operational Evolution and Financial Performance

Etsy's financial performance in 2025 reflects a period of strategic recalibration and targeted investments, yielding encouraging signs of improvement despite a challenging macroeconomic backdrop. For the third quarter ended September 30, 2025, Etsy reported consolidated revenue of $678.03 million, a 2.4% increase year-over-year, surpassing expectations. Net income for the quarter stood at $75.50 million, a substantial increase from $57.37 million in Q3 2024. Adjusted EBITDA reached $171.93 million, with an Adjusted EBITDA margin of 25.4%.

Consolidated Gross Merchandise Sales (GMS) for Q3 2025 was $2.72 billion, exceeding the high end of guidance and marking a return to year-over-year growth when excluding the divested Reverb segment. The core Etsy marketplace GMS, while still down 2.4% year-over-year at $2.43 billion, showed a sequential improvement of approximately 300 basis points from Q2 2025. This improvement is attributed to enhanced app performance, effective marketing, and other strategic investments. Depop, the fashion resale marketplace, demonstrated accelerated growth, with GMS up 39.4% year-over-year to $292.10 million in Q3 2025, driven by new user acquisition and improved buyer conversion, particularly in the U.S.

Revenue streams saw a notable shift: Marketplace revenue decreased by 1.7% year-over-year to $468.06 million, primarily due to the sale of Reverb and a decline in transaction fees from the core Etsy marketplace. This was partially offset by an increase in payments revenue, largely driven by Depop's growth. Services revenue, however, surged by 12.7% year-over-year to $209.97 million, mainly due to a $13.50 million increase in advertising revenue from higher average price per click on Etsy Ads.

Operating expenses saw mixed trends. Cost of revenue increased by 4.9% to $194.65 million, driven by higher costs of refunds and cloud-related hosting, partially offset by the Reverb sale. Marketing expenses rose 5.8% to $207.84 million, reflecting increased investment in performance marketing, though Etsy marketplace brand marketing spend decreased. Product development expenses increased 5.7% to $113.38 million due to higher employee compensation, partially offset by the Reverb sale.

General and administrative expenses decreased 7.8% to $79.45 million, benefiting from the Reverb sale and the non-recurrence of prior-year non-income tax items.

Liquidity remains robust, with cash and cash equivalents and short-term investments totaling $1.50 billion as of September 30, 2025.

The company generated $376.30 million in positive operating cash flows for the nine months ended September 30, 2025, and reported net working capital of $1.20 billion. Etsy also actively manages its capital structure, having issued $700 million in convertible senior notes in June 2025 and repurchased approximately 2.50 million shares for $150 million concurrently. The company has reduced its share count by 17% since December 2023 through its buyback program. These financial details underscore Etsy's ability to maintain strong profitability and cash flow while strategically investing in growth initiatives and managing its capital effectively.

Strategic Imperatives: Fueling the Flywheel

Etsy's strategic initiatives are designed to create a "customer relationship flywheel" that drives sustainable growth by enhancing discovery, engagement, and connection. A central pillar of this strategy is the evolution of the Etsy app. The app is being redesigned to be more intuitive, inspiring, and browsable, moving beyond a transactional endpoint to a starting point for inspiration and discovery. This is achieved through features like a redesigned home screen, simpler navigation, and a reimagined discovery feed powered by new recommendation models. Early results are promising, with engagement on the app home screen up significantly and app home GMS growing 20% year-over-year in Q3 2025. The app's higher engagement rates (users visit 5x more often and view 3x more pages) provide richer data for personalization, which is crucial for the flywheel.

Personalization efforts are being significantly advanced through AI and machine learning. New models are deepening "buyer understanding" by interpreting user interests through advanced ML and LLM techniques, and "item understanding" by extracting richer insights from listing images. These improvements have already delivered double-digit increases in engagement metrics and measurable conversion gains across search and ads. The goal is to make Etsy feel like a "personal boutique" for each user, delivering tailor-made content and surprising them with unexpected finds.

Etsy is also evolving its marketing strategy to meet shoppers where they discover. This includes a significant reallocation of brand marketing spend away from linear TV to upper-funnel digital channels like social video and streaming. This shift aims to spark engagement and inspiration, highlighting the unique stories and creativity of Etsy sellers. Owned marketing channels, such as personalized email and push notifications, are becoming powerful drivers of attributed GMS, leveraging deeper customer insights to deliver relevant nudges.

To deepen loyalty, Etsy is piloting targeted offers for its most active buyers and launching the latest beta iteration of the Etsy Insider Loyalty program. This program aims to reward frequent shoppers with benefits like shipping discounts and 5% back in Etsy credit, while ensuring sustainable economics for the company. Furthermore, Etsy is committed to supporting its sellers, recognizing that their creativity is the marketplace's core differentiator. New AI-powered tools are being launched to help sellers with listing titles and buyer messages, and access to live, knowledgeable support is being increased. These efforts have already resulted in seller satisfaction scores rising more than 10 percentage points year-over-year.

Outlook and the Path Ahead

Etsy's outlook for the remainder of 2025 signals cautious optimism, underpinned by the anticipated benefits of its strategic investments and a rebalanced product development approach. For the fourth quarter of 2025, Etsy expects consolidated GMS to range between $3.5 billion and $3.65 billion. The midpoint of this guidance implies a further sequential improvement in the year-over-year growth rate for both the consolidated business and the core Etsy marketplace. Consolidated take rate is projected to be approximately 24.5%, while the adjusted EBITDA margin is expected to be around 24%.

This Q4 EBITDA margin guidance reflects a strategic decision to significantly increase brand marketing investment at Depop. This investment is considered "discretionary and opportunistic," driven by Depop's strong momentum and its annualized run rate exceeding $1 billion. Management views Depop as a potential "multibillion-dollar asset" and is willing to compress near-term margins to accelerate awareness and penetration in the large and growing apparel resale market. This increased investment in Depop is expected to extend into the first half of 2026.

The company's full-year 2025 expectations, while not providing a specific consolidated GMS figure, anticipate improved Etsy marketplace GMS performance beyond the first quarter. This improvement is expected as the company moves past the "opportunity cost phase" of its 2024 product development shift, with the benefits of foundational investments in the Etsy shopping experience beginning to emerge. The 2025 product development plan is rebalanced to accelerate near-term GMS-driving experimentation while continuing longer-term priorities, including incremental hiring in AI and ML, which may lead to modest deleverage in product development spending. Consolidated marketing spend as a percentage of revenue is intended to remain fairly constant year-over-year, with a focus on ROI-driven reallocations. Consequently, adjusted EBITDA margins are expected to be stronger in the second half of 2025 than in the first half.

A significant leadership transition is also on the horizon, with Kruti Patel Goyal, current President and Chief Growth Officer, set to become CEO on January 1, 2026. Josh Silverman, who has led Etsy for over eight years, will transition to Executive Chair. This change is positioned as a natural evolution, with Goyal bringing deep knowledge and a fresh perspective to lead Etsy into a new phase focused on harnessing AI and further personalizing the shopping experience.

Risks and Competitive Headwinds

Despite Etsy's strategic advancements, several risks and competitive headwinds could impact its future performance. Global macroeconomic and geopolitical uncertainty remains a significant concern, potentially affecting consumer discretionary spending, which directly impacts Etsy's Gross Merchandise Sales. The evolving tariff landscape, particularly changes to "de minimis" exemptions, poses a risk to cross-border trade. While Etsy believes it is less dependent on Chinese imports than many competitors, the suspension of the de minimis exemption by an executive order effective August 29, 2025, has already impacted some Etsy orders. Broader tariff regimes could create friction for international buyers and sellers, potentially leading to increased costs or shipping delays.

Etsy operates in a highly competitive e-commerce environment, facing established giants like Amazon and eBay, as well as agile platforms like Shopify. These competitors often possess greater resources, brand recognition, and logistical capabilities, enabling them to compete aggressively on price and delivery speed. While Etsy differentiates through unique inventory and human connection, the constant pressure from competitors could challenge its market share and profitability. The increasing reliance on AI and machine learning also introduces risks, as these complex systems are subject to litigation, regulatory scrutiny, and potential errors or inadequacies that could impact user experience and trust.

Operational risks include the trustworthiness and safety of its marketplaces, with the potential for fraudulent activity or policy violations by bad actors. Technology disruptions, cybersecurity incidents, and reliance on third-party services and infrastructure also present vulnerabilities that could lead to service interruptions, data loss, or reputational damage. Furthermore, the company's ability to recruit and retain a talented and diverse employee base, particularly in critical areas like engineering, is crucial for executing its growth strategy. Leadership transitions, while strategic, also introduce a period of adjustment and potential uncertainty.

Conclusion

Etsy stands at a pivotal juncture, strategically evolving its platform to deepen its unique value proposition in a rapidly changing e-commerce landscape. The company's commitment to "Keep Commerce Human" is being amplified through significant investments in AI and an app-centric experience, aiming to transform shopping into a highly personalized and inspiring journey. The recent financial performance, particularly the return to consolidated GMS growth in Q3 2025 and Depop's accelerated expansion, provides encouraging signals that these initiatives are gaining traction.

The upcoming leadership transition to Kruti Patel Goyal underscores a forward-looking vision focused on leveraging technological differentiation to enhance buyer and seller experiences. While macroeconomic uncertainties and intense competition present ongoing challenges, Etsy's emphasis on quality, personalization, and community, coupled with its robust liquidity and disciplined capital allocation, positions it to capitalize on its distinct market niche. Investors should closely monitor the execution of its AI and app-first strategies, the continued growth trajectory of Depop, and the company's ability to effectively mitigate external headwinds, as these factors will be critical in determining Etsy's long-term market share and profitability in the evolving world of digital commerce.