Etsy (ETSY +5.34%) might have a long history of delighting shoppers , but investors have experienced nothing but disappointment lately.
The stock boomed during the pandemic as the stay-at-home effect fueled interest and demand for its products, but like a number of e-commerce companies, it has struggled to gain traction since then, and sales on the platform have steadily fallen.
While the excuse of a post-pandemic hangover may have worked in 2022 and even 2023 as consumer spending reverted to other categories, by now it's clear that there are other challenges plaguing the craft-oriented online marketplace. As the chart below shows, Etsy stock continues to plumb new depths with shares sliding following another disappointing earnings report on Wednesday.
As you can see, the stock has steadily fallen over the last 18 months, showing investors seems to be gradually giving up on it.
Etsy's first-quarter earnings report did little to alter that narrative. Gross merchandise sales (GMS), or the total value of goods sold on the platform, fell 6.5% to $2.8 billion, continuing a streak of declining business, and overall active sellers and active buyers both fell, with sellers down 11.3% to 8.1 million. Active sellers on the Etsy marketplace (which doesn't include its other platforms) dropped 23% from 7 million to 5.4 million.
Additionally, Etsy announced that it was selling the musical instrument marketplace Reverb, which it acquired in 2019, taking an impairment charge of $101.7 million, essentially meaning it sold the company for $101.7 million less than it had bought it for.
After the latest report, investors must be wondering if there's anything that can turn around Etsy's fortunes. Let's look at what's gone wrong for the company in the last few years before addressing its turnaround prospects.
Image source: Getty Images.
A misguided acquisition strategy
Etsy's purchase of Reverb in 2019 began what the company called its "House of Brands" strategy, in which it aimed to acquire sub-brands for its e-commerce marketplace and fold them into its portfolio, applying the same strategies that had worked for the Etsy marketplace.
At its peak, Etsy had three sub-brands in its portfolio: Reverb, Depop, and Elo7. With the sale of Reverb, it will be left with just Depop. It took a loss on the sale of both Reverb and Elo7, a Brazilian online marketplace similar to Etsy that it sold in 2023 after acquiring it in 2021. The company also took a $1 billion impairment on the value of Depop and Elo7 in 2022, though the write-off was primarily for Depop, which is mostly a vintage fashion resale marketplace with an Instagram-like interface where shoppers can follow sellers.
Depop, at least, is growing rapidly now, with GMS up 32% in 2024 and growth of around 60% in the U.S. However, it's clear the acquisition strategy has been a failure. Not only has the company taken an accounting loss on all three of the brands it acquired, but those moves have also distracted from the core business, which has clearly underperformed management and investor expectations.
A seller exodus
There's no question about it. Sellers are fleeing Etsy's platform, as the 23% decline over the last year indicates. A marketplace like Etsy isn't much without its seller base; unlike Amazon, it doesn't sell any first-party products.
There's no single reason for the decline in sellers on Etsy, but probably the biggest, along with the overall growth challenges in the business, is the increase in seller fees. Etsy's take rate, essentially the percentage of revenue divided by GMS, has crept up over the years, clocking in at 23.3% in Q1 2025. That compares to 21.6% in Q1 2024 and 17.8% in 2022, meaning the take rate has increased 31% in three years.
Management would likely defend those increases by saying it's invested more in the platform and technology, but fees on sellers have clearly gone up, and there hasn't been a related increase in sales, as the decline in GMS shows. There's also concern that the brand has been diluted by non-handmade goods, such as products made in China and conventional products with a logo attached.
For a platform like Etsy, there's natural tension between staying true to the brand promise of artisan-made goods and expanding the marketplace to new products, but whether management intended this or not, the brand appears to have been compromised and diluted.
NYSE: ETSY
Key Data Points
Can Etsy recover?
On Etsy's earnings call, the company touted now-familiar key performance metrics in areas like app usage and advertising, but those gloss over the structural problems in the business. Management needs to reckon with those problems first rather than trying to highlight whatever silver lining it thinks is buried in the numbers. In order for the stock to recover, the company will have to return to GMS growth, which likely means growing active sellers as well.
With its low valuation, Etsy looks ripe for activist investors, and activists did drive a surge in the stock in 2017 after bringing in new leadership, cutting costs, and refocusing the business. Activist investor Elliott Management took a stake last year and now owns 13% of the company, but it has been unable to effect real change. An acquisition is another possibility. The company could end up in the hands of a buyer like Shopify or Target, or possibly a private equity firm.
Etsy is a unique property in e-commerce, and its valuation would give it upside in a turnaround. However, management's execution has been poor since the pandemic, and it seems to be unwilling to face the core problems in the business. If nothing changes, Etsy stock will continue to head lower, as boosting the take rate is not a long-term fix for declining GMS.
The company needs a change in management, a strategic partner -- if not a full-on acquisition -- or a similar wholesale change. As the brand loses relevance, the time left for a recovery is running out.
