ETSY Q2 Deep Dive: Strategic Investments Drive Engagement, Margin Pressures Persist

Online marketplace Etsy (NASDAQ:ETSY) beat Wall Street’s revenue expectations in Q2 CY2025, with sales up 3.8% year on year to $672.7 million. Its non-GAAP profit of $0.69 per share was 36.8% below analysts’ consensus estimates.

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StockStory’s Take

Etsy’s second quarter results were met with a negative market reaction, reflecting investor concerns despite exceeding Wall Street’s revenue expectations. Management attributed the quarter’s performance to targeted investments in enhancing the app experience, personalized marketing, and increased paid social spending. CEO Josh Silverman pointed to improvements in app engagement, noting, “monthly active users are up 7% year-over-year,” and highlighted the company’s efforts to drive discovery and inspiration on its platform. However, persistent declines in active buyers and margin pressures from higher marketing investments weighed on sentiment.

Looking forward, Etsy’s management emphasized continued investments in app development, machine learning for personalization, and loyalty initiatives as key drivers of future growth. CFO Lanny Baker stated that the company is managing margins to the high-20% range to allow for these investments, aiming to reignite revenue momentum. The company plans to expand personalized communications and roll out an updated Insider loyalty program by the holiday season, with Silverman saying, “we think we have a new version of the program that can lean into things people care about, like free shipping on millions of listings.”

Key Insights from Management’s Remarks

Management cited improvements in app engagement, paid social effectiveness, and refined marketing tactics as major contributors to the quarter’s results, while also noting ongoing challenges in buyer retention and profitability.

• App engagement gains: Management reported that app-driven sales grew year-over-year, with monthly active users up 7%. The app now accounts for nearly 45% of total marketplace sales, reflecting efforts to make the platform more browsable and habit-forming.
• Personalization and owned channels: Etsy increased personalized content in marketing communications, driving a 33% year-over-year boost in gross merchandise sales (GMS) attributed to email and push notifications. Nearly 40% of these communications are now individualized, with a goal of near-total personalization by year-end.
• Paid social investment: The company significantly increased spend on social platforms like Instagram, Pinterest, and TikTok, seeing improved return on investment. This shift aims to reach potential customers where they discover new products and build brand awareness outside traditional search channels.
• Product recommendations and machine learning: Etsy is overhauling its recommendation engine using large language models (LLMs) and generative AI, with Chief Technology Officer Rafe Colburn spearheading efforts to improve search relevance and discovery, building on successful strategies from Depop.
• Shift in marketing mix: The company is reducing linear TV spend and reallocating resources toward digital channels, influencer partnerships, and content marketing to meet shoppers where they are. This realignment is intended to more efficiently drive traffic and engagement.

Drivers of Future Performance

Etsy expects growth in the coming quarters to be shaped by continued investment in personalization, loyalty programs, and paid marketing, but acknowledges ongoing risks around buyer retention and operating costs.

• Loyalty program expansion: Management plans to launch an updated version of its Etsy Insider loyalty program by the holiday season, targeting both new and habitual buyers. The company aims to improve purchase frequency and customer retention while testing ways to control benefit costs and scalability.
• AI-driven personalization: The company is investing in advanced machine learning and generative AI to deliver better product recommendations and more tailored shopping experiences. Management believes these tools will increase buyer engagement and drive higher conversion rates over time, but notes that full benefits may take several quarters to materialize.
• Marketing efficiency and margin management: Etsy will balance higher marketing investments, particularly in paid social and app acquisition, with disciplined cost control. While management expects to maintain adjusted EBITDA margins in the high-20% range, they highlight that near-term profitability may fluctuate as the company prioritizes long-term growth and competitive positioning.

Catalysts in Upcoming Quarters

In the quarters ahead, the StockStory team will monitor (1) adoption and effectiveness of the revamped Etsy Insider loyalty program, (2) progress in machine learning and AI-powered personalization—particularly as more communications become individualized, and (3) the impact of ongoing shifts in marketing spend, especially towards digital and social channels. Execution on these priorities will be crucial to reversing buyer declines and sustaining long-term growth.

Etsy currently trades at $66.55, up from $60.25 just before the earnings. Is there an opportunity in the stock?See for yourself in our full research report (it’s free).

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