Etsy Navigates Challenges with Strong Revenue Beat, Apparel, and Gift Demand Driving Growth

Etsy (NASDAQ: ETSY) reported stronger-than-expected first-quarter 2025 results, with revenue rising 0.8% year-over-year to $651.2 million, surpassing analyst estimates of $642.7 million. Despite macroeconomic headwinds and a decline in core marketplace sales, the company’s focus on niche categories like apparel resale via its Depop subsidiary and curated gift experiences provided critical growth momentum. Let’s unpack the drivers, risks, and strategic moves shaping Etsy’s trajectory.

Revenue Resilience Amid GMS Declines

While Etsy’s consolidated Gross Merchandise Sales (GMS) fell 6.5% to $2.79 billion, the company’s revenue take rate—a key profitability metric—hit a record 23.3%, up 170 basis points year-over-year. This expansion stemmed from higher on-site advertising revenue (driven by both Etsy and Depop), seller setup fees, and payments services. The resilience of revenue despite lower GMS underscores the effectiveness of Etsy’s strategy to monetize its platform more deeply.

Depop: The Apparel Resale Engine

Etsy’s $101.7 million impairment charge from the Reverb sale (now excluded from future financials) overshadowed the quarter’s bright spot: Depop’s record GMS since its 2021 acquisition. As the fastest-growing U.S. online resale apparel platform, Depop’s performance highlights Etsy’s bet on secondhand markets and Gen Z-centric trends. While revenue specifics for Depop remain undisclosed, its 60% year-over-year U.S. GMS growth in 2024 suggests it is a critical growth lever.

Gifts: A Strategic Differentiator

Etsy’s curated “Gift Mode” and personalized item offerings continue to outperform broader market trends. Though not explicitly broken out in revenue terms, gifting-related GMS grew in the “low single digits” year-over-year, outpacing overall GMS declines. CEO Josh Silverman emphasized that Gift Mode’s conversion rate surged over 200% year-over-year, signaling strong buyer engagement for occasions like birthdays and holidays. Personalized apparel and decor—accounting for roughly one-third of total GMS—also saw double-digit growth in 2024, pointing to untapped potential in this segment.

Challenges and Strategic Shifts

1. Buyer Retention Struggles: Habitual buyers (those purchasing quarterly) fell 11% to 6.2 million, reflecting broader consumer caution. Etsy is countering this with AI-driven reactivation campaigns and loyalty programs like Etsy Insider.
2. Seller Decline: Active sellers dropped 11.3% to 5.4 million, likely due to macro pressures and competition. Improved seller tools, such as the Etsy Apps platform, aim to retain creators by streamlining workflows.
3. Tariff Mitigation: A task force is prioritizing “shop local” initiatives to offset U.S. tariff impacts, with localized search filters and educational resources for sellers.

AI and Innovation as Growth Catalysts

Etsy’s 2025 focus hinges on AI/ML to enhance user experience and discovery. Key investments include:
- Algotorial Content: Curated AI-generated collections to boost engagement.
- Improved Search: Enhanced algorithms for Depop and Etsy, reducing buyer friction.
- Chatbots: Now handling 66% of U.S. and Canadian inquiries, improving support efficiency.

These moves align with management’s goal to “keep commerce human” while scaling operations. The app’s all-time high GMS share and 10%+ increase in AI-personalized emails/push notifications signal early wins.

Outlook and Risks

Etsy projects Q2 GMS declines “similar to or slightly better than” Q1’s 6.5% drop, with the take rate holding near 23.3%. While Adjusted EBITDA margin is expected to dip to ~25%, cost discipline remains intact. Risks include:
- Consumer Spending Volatility: Uncertainty in core markets like the U.S. and Europe could prolong GMS weakness.
- Competitor Pressure: Amazon Handmade and Walmart’s secondhand platforms threaten Etsy’s niche.
- Depop’s Scalability: Sustaining Depop’s U.S. growth while expanding into new markets will test execution.

Conclusion: A Niche Play with Long-Term Potential

Etsy’s Q1 results underscore its ability to navigate headwinds through strategic monetization and innovation. The 0.8% revenue growth and record take rate demonstrate operational resilience, while Depop and gift-focused initiatives highlight high-potential growth areas. With AI investments poised to boost discovery and loyalty programs scaling, Etsy is positioning itself as the go-to platform for unique, personalized goods—a space where Amazon’s scale is less of an advantage.

Investors should weigh near-term GMS pressures against Etsy’s long-term differentiation. At a forward P/E of ~30 (vs. 20 for Wayfair), the stock demands sustained execution on its AI roadmap and Depop’s expansion. For those willing to bet on niche e-commerce and the “human commerce” narrative, Etsy’s Q1 results reinforce its staying power in a challenging landscape.

Final Take: Hold for now, but monitor Q2 GMS trends and AI-driven engagement metrics. Long-term bulls may find value in its unique positioning, but near-term volatility remains a risk.