Etsy (NASDAQ:ETSY) has been winning big in 2020 with new buyers, which contributed to strong revenue performance in the third quarter. Revenue more than doubled year over year, while new buyers made up a quarter of its gross merchandise sales. 

While investors might be concerned about how a COVID-19 vaccine could slow down Etsy's momentum if more people feel comfortable shopping in stores again, Etsy still has opportunities to drive further growth.

More people are discovering Etsy

One of management's top priorities has been to convince lapsed buyers that Etsy can be a go-to place to shop for a range of items for many occasions. 

A merchant wrapping an order.

Image source: Getty Images.

The pandemic gave Etsy some momentum in this effort. Etsy added 10 million new buyers and 5 million reactivated buyers over the last 12 months through the third quarter. A reactivated buyer is someone who hasn't bought anything on the platform in the last 12 months. Overall, the number of active buyers grew by 56% year over year, reaching 69 million, representing roughly half of all unique buyers who have ever bought anything on Etsy.  

People obviously like shopping on Etsy. It's a unique marketplace where people can find vintage and other one-of-a-kind items. That's Etsy's pitch, but on one hand, this niche position that Etsy occupies in e-commerce might present a challenge in getting older buyers to come back. It might be that items on Etsy are so special that many buyers may only think to shop there for gift-giving purposes, which may only come once a year.

On the other hand, Etsy is gaining momentum and could be reaching a tipping point in its growth curve. Consider that there are still approximately 70 million people who have shopped on Etsy before, but not in the last 12 months. That spells a massive opportunity.

What's more, there are still millions of people who have yet to discover Etsy. It's clear that CEO Josh Silverman sees this year as a potential turning point for Etsy's growth. During the call, he said: "I think we're broadening our appeal to more and more types of people and more and more demographics, and we love it." 

Etsy is still improving

Management outlined some of the ways it's working to keep current buyers engaged and bring back lapsed buyers.

First, Etsy just launched a personalized search feature. With this new functionality, Etsy takes users' clicks, favorite items, and items they have added to their shopping carts and delivers a unique search result for each keyword. Now, two people who enter the same keyword will get different results. This should make the search and discovery experience on the marketplace much easier and more fun for buyers, which could keep them coming back.

Etsy is also launching a new Gift Like You Mean It advertising campaign for the holidays, which will seek to build an emotional connection with the brand by telling a story. The new ads are reminiscent of the incredibly effective advertising that Apple has done over the years and could be very effective in driving higher sales on the platform.  

Along with marketing investments, Etsy is investing heavily in its engineering team. The headcount increased 14% year over year in the third quarter, but Etsy is still catching up with its growth and scale. Part of the increase in talent is to assist with improving buyer frequency on the marketplace. It's worth noting that Etsy's average revenue per employee has nearly tripled to $1.1 million since fiscal 2016, which shows that the business should only get more productive the more it grows and brings in more talent. 

Etsy still has a long way to go

It's reasonable to assume that Etsy will see its revenue growth moderate from recent triple-digit levels once vaccines for COVID-19 are available and people feel more comfortable returning to in-store shopping. But Etsy still grew revenue by 35% in 2019.

Still, we can't discount Etsy's niche in e-commerce and its ability to continue driving robust growth by bringing back lapsed buyers. The improvements it's making to search and marketing, and other behind-the-scenes tweaks to the shopping experience, show a business that is still far away from its potential.

It's a great sign that Etsy has been seeing strong growth across major retail categories, such as apparel and personal care products. The appeal of discovering items across all these categories should go a long way toward bringing in more buyers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.