Etsy's Turnaround Strategy: Can a Higher Take Rate and AI-Driven Growth Offset Declining Buyer Activity?

In the evolving e-commerce landscape, where consumer behavior shifts as rapidly as technology, Etsy, Inc. (NASDAQ: ETSY) faces a critical test of its resilience. Once a darling of the handmade goods market, the company has seen its gross merchandise sales (GMS) decline and active buyer base shrink in recent quarters. Yet, its strategic pivot toward AI-driven personalization and a higher take rate has sparked debate: Can these initiatives reinvigorate growth and justify long-term investment?

The Financial Baseline: A Mixed Picture

Etsy's Q2 2024 results reveal both progress and peril. Revenue rose 4% year-over-year to $672.7 million, driven by a 24% take rate (up from 22% in Q2 2023), as advertising services expanded. However, GMS fell 5% to $2.81 billion, with active buyers dropping 3.4% to 93.3 million and active sellers declining 7.8% to 8.1 million. These metrics underscore a fundamental challenge: Etsy's core marketplace is losing traction.

The company's Depop subsidiary, a fashion-focused platform, offers a bright spot. Its GMS grew 35.3% year-over-year to $249.6 million in Q2 2024, projecting a $1 billion annual run rate. This diversification could offset Etsy's core struggles, but the parent platform remains the revenue anchor.

AI as the Strategic Lever

Etsy's response to declining engagement hinges on artificial intelligence. In Q1 2025, the company reported a nearly doubled user engagement rate after introducing AI-powered personalized homepages. These homepages, combined with tailored push notifications and email campaigns, now account for 44.5% of total GMS—up from previous levels. The app's contribution to GMS reached an all-time high, indicating that AI is not just improving user experience but also driving measurable revenue.

The company's “algatorial curation” model—a hybrid of human expertise and AI—has further refined product discovery. Collections like “Island Luxe” and “Modern Farmhouse” are algorithmically expanded from human-curated seeds, ensuring both aesthetic coherence and relevance to user behavior. Etsy also tested generative AI for personalized marketing copy, a move that could enhance ad efficiency and conversion rates.

Early results are promising. Q1 2025 saw a 22-month high in monthly active users (MAUs), driven by improved product discovery and ad efficiency. Truist Securities upgraded Etsy's price target to $60 in June 2024, citing these gains. However, the company's net loss of $52.1 million in Q1 2025—largely due to a Reverb impairment charge—highlights the fragility of its financial position.

The Take Rate Dilemma

Etsy's strategy to increase its take rate has been a double-edged sword. While a 24.5% take rate is now projected for Q3 2024, this comes at a time when buyers are increasingly price-sensitive. A 2025 analysis by Morningstar found that a 1% increase in take rate typically reduces GMS by 0.5%, as users seek cheaper alternatives. Etsy's ability to maintain this rate without further alienating sellers or buyers will be pivotal.

The company's recent sale of Reverb, its music gear marketplace, has freed up resources for core initiatives but also removed a growth engine. With Depop's momentum and AI-driven improvements, Etsy must now prove that its higher take rate is sustainable.

Long-Term Risks and Opportunities

Etsy's turnaround hinges on three factors:
1. AI Scalability: Can the company sustain user growth through personalization without over-relying on algorithmic curation? Early data suggests yes, but long-term user fatigue or data privacy concerns could emerge.
2. Depop Integration: Will Depop's youthful, fashion-forward audience translate into broader GMS growth for Etsy? The platform's 35% year-over-year growth is encouraging, but it remains a fraction of Etsy's total market.
3. Macroeconomic Headwinds: Inflation and shifting consumer priorities (e.g., demand for fast fashion vs. handmade goods) could pressure margins. Etsy's focus on sustainability may help, but it's no panacea.

Investment Implications

For investors, Etsy presents a high-risk, high-reward proposition. The company's AI-driven strategies have shown early success in stabilizing user engagement and boosting app-driven GMS. However, declining active buyer counts and a fragile profit margin (adjusted EBITDA fell 5.8% in Q2 2024) warrant caution.

A compelling investment case would require Etsy to:
- Maintain a 24%+ take rate without further GMS erosion.
- Grow Depop to $1.5 billion in annual GMS by 2026.
- Achieve a 10% year-over-year increase in habitual buyers (currently 6.1 million).

If these milestones are met, Etsy could reposition itself as a niche leader in personalized e-commerce. However, failure to address declining buyer activity—even with AI—could render the higher take rate unsustainable.

Conclusion: A Cautious Bull Case

Etsy's turnaround strategy is ambitious but not unworkable. The higher take rate provides near-term revenue resilience, while AI-driven personalization offers a path to re-engage buyers. Depop's growth adds a critical tailwind.

For long-term investors, the key is patience. Etsy's stock price has already priced in some of these AI-driven improvements, but a sustained recovery will take time. If the company can stabilize its core marketplace and leverage AI to deepen customer relationships, it may yet reclaim its place as a disruptor in e-commerce. For now, a cautious “buy” makes sense for those comfortable with volatility and a 3–5 year horizon.