During the COVID-19 pandemic, Etsy (ETSY, Financial) emerged as a standout success story in the e-commerce sector. The platform, known for its unique, handmade, and vintage items, benefited immensely from the global shift toward online shopping. With people confined to their homes and eager to add personality to their spaces, Etsy's model of connecting creative entrepreneurs with buyers seeking unique goods thrived. With increased digital adoption and a surge in demand for everything from face masks to home decor, Etsy's stock soared, exemplifying the e-commerce boom during the pandemic.

However, as we've moved beyond the pandemic, Etsy has struggled to sustain that momentum. The factors that fueled its growth have largely dissipated, and Etsy now faces a new set of challenges. This article explores Etsy's journey from pandemic-era success to post-pandemic realities, along with my views on the key factors shaping its future potential.

Business Model and Market Position

Etsy operates in a unique niche within the e-commerce space, setting itself apart as a marketplace for handcrafted, vintage, and artisan products. Unlike massive generalist platforms like Amazon, Etsy's value proposition lies in connecting small creators and artisans with a targeted customer base that appreciates unique and custom-made goods. This positioning creates a strong sense of community and loyalty, appealing to buyers and sellers alike who value supporting small businesses and ethical consumption.

Etsy's business model relies on a tailored approach to bespoke items, giving it a competitive advantage over other e-commerce platforms. However, these types of items tend to be more expensive than standardized, mass-produced goods, which presents a challenge. As the economic cycle has shifted and interest rates have risen at an unprecedented pace, consumers have cut back on discretionary spending, a category that includes Etsy's offerings. This shift has hit Etsy's growth, making it challenging to maintain the high levels of demand seen during the pandemic.

In addition to economic pressures like inflation, the competitive landscape has intensified. Direct rivals, such as eBay and niche platforms, as well as giants like Amazon and Walmart, have expanded their own offerings of artisan and handmade goods. Although Etsy may still hold an edge in terms of its community-driven brand, the crowded market has raised the stakes significantly.

Market Share and Growth

Source: Shopify

As of 2024, Etsy holds a relatively modest share in the global e-commerce market, estimated at around 0.4%. According to data from eMarketer, global e-commerce sales have grown at a compound annual growth rate (CAGR) of about 9% since 2022, whereas Etsy's sales growth during this period has lagged, with a CAGR of approximately 4%. This disparity reflects the challenges Etsy has faced in capturing more of the expanding e-commerce market despite its initial boom during the pandemic.

Source: Author based on company data

However, Since 2021, Etsy's gross merchandise sales (GMS) and active sellers have both been on the decline. I believe there are two main reasons for this drop in active sellers. First, Etsy's most valuable assets, its sellers and buyers, are sensitive to platform trends and market positioning. Sellers are drawn to platforms they view as thriving and forward-looking, where they can build a brand and maximize their reach. With Etsy's GMS stagnant and other platforms gaining more traction, some sellers may seek out alternatives that offer greater opportunities. Secondly, in 2022, Etsy raised its transaction fee from 5% to 6.5%, a change that wasn't well-received among sellers, especially since the fee increase was meant to fund marketing and new seller tools. However, despite these investments, Etsy's GMS remains in decline, resulting in higher costs for sellers but with diminishing returns. This trend has led some sellers to prefer cheaper alternatives, which ultimately affects buyer traffic as well.

A marketplace is only as vibrant as the sellers who populate it. If sellers find better conditions elsewhere, the flow of products and customers will follow, setting off a potential domino effect that could impact Etsy's overall ecosystem.

Even though marketing expenses have increased, Etsy has struggled to reignite its GMS or attract a substantial number of new customers. I see ads for Amazon, Alibaba/AliExpress, and Shopify, very often, but I rarely see similar promotional efforts for Etsy. It's possible that Etsy's marketing budget is either insufficient compared to competitors or being allocated ineffectively.

Source: SimilarWeb

Financials

Etsy reported its Q3 2024, achieving revenues of $662 million, which exceeded market expectations with a modest 4% year-over-year YoY growth. However, the good news seemed to end there. Earnings per share (EPS) fell short of estimates by 13%, with reported EPS at $0.45, representing a 31% decline YoY. This drop was largely due to a shift in other income (expense) from an $8 million gain last year to a $13 million expense this quarter. Adjusted EBITDA came in at $184 million, a 3% decrease YoY.

The share count has decreased by 6% YoY, as management has been actively repurchasing shares and recently announced a new $1 billion share repurchase program. While I appreciate the intention to create shareholder value in a difficult environment, I believe there may be more strategic ways to enhance long-term value. Reducing stock-based compensation, which remains relatively high for a company at this stage, would be a start. Additionally, I think Etsy should further invest in its business to help reignite traction and support long-term growth.

Etsy's balance sheet raises some concerns. The company carries $2.3 billion in debt compared to just $1 billion in cash. With more liabilities than assets, it results in a negative equity position. That said, one positive is that Etsy remains free cash flow (FCF) positive, with an FCF margin of over 20%. This strong FCF generation does provide Etsy with some flexibility, allowing it to sustain operations and meet debt obligations without needing external financing in the near term.

Looking at the company's guidance for the full year, management expects GMS to decline in the low to mid-single digits YoY, with revenue expected to come in flat.

Risks

From my perspective, several risks could hold back Etsy's ability to return to its pre-pandemic growth trajectory:

Etsy's market has become more crowded. Larger players like Amazon and eBay, and even niche sites, are targeting the handmade and artisan goods market. Amazon Handmade, for instance, is a direct challenge to Etsy, as Amazon brings massive reach and resources that Etsy simply can't match.

As consumers now have more shopping options, I see keeping engagement levels up as a serious challenge. Etsy's unique value proposition could risk becoming stale for some buyers, especially if alternative platforms offer similar items or if buyers revert to more traditional shopping.

Another significant risk for Etsy is its ability to continually attract and retain quality sellers. Etsy's marketplace thrives on the variety and uniqueness of its listings, largely driven by small business owners and individual artisans. However, as Etsy has scaled, seller fees have increased, and some sellers have expressed concerns about the platform's policies, such as mandatory offsite ads and commission hikes. These factors could lead some sellers to look for alternative platforms, especially if they perceive that the costs outweigh the benefits.

Valuation

Currently, Etsy's stock trades at a price-to-earnings (P/E) ratio of 27x and a forward P/E ratio of 19x, with a price-to-sales ratio of 3x. These metrics place Etsy near the lower end of its historical trading range, which could appear attractive at first glance. However, given the challenges Etsy is currently facing, this valuation might be justified. I find it hard to justify paying a 27x P/E for a company facing declining metrics in a challenging cycle. Before considering this multiple, I would want to see improvement in key operational areas, including growth in active users and GMS.

I also used a discounted cash flow (DCF) model that combines multiple-based approaches and a perpetuity growth model. From this, I estimate Etsy's intrinsic value at around $65 per share, indicating a potential upside of about 23% from current levels. However, I don't view a 23% discount as compelling enough given the risks involved. Etsy's fundamentals are under strain, its debt levels are high, and revenue growth has stalled. I also would like to note that my DCF model faces some limitations in forecasting — when or if at any point— Etsy will successfully reignite growth.

Source: Author

Conclusion

A few years ago, Etsy held a distinct competitive advantage as one of the first e-commerce platforms connecting artisans and small business owners with consumers seeking unique, handmade items. However, that advantage has been eroded by competitors who offer similar products with faster shipping and lower fees. In my view, Etsy's once-strong positioning has weakened, and it could continue to lose market share unless it finds a way to differentiate itself and offer a unique value proposition.

While I acknowledge that external factors such as inflation and rising interest rates have certainly created headwinds, I believe Etsy could have navigated this cycle more effectively. Currently, I see the company in a potentially declining phase within its business cycle. Without a clear path to reigniting growth and addressing its competitive and operational challenges, Etsy may struggle to regain its status. Until I see evidence of a turnaround, I expect Etsy to remain under pressure in the near to medium term.