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Etsy (ETSY -8%) is sent back toward 2025 lows today following a Q4 revenue miss and deflating forward-looking comments. The e-commerce company expects Q1 consolidated gross merchandise sales (GMS) to decline at a similar rate to its yr/yr performance in Q4, which was a 6.8% drop. Another quarter of yr/yr GMS compression remains frustrating to investors. Etsy has not posted a yr/yr improvement since 3Q23, with its declines only steepening.

Etsy's woes branch from consumers shifting their tastes toward low prices and fast delivery, benefiting titans like Amazon (AMZN) and Walmart (WMT). While not an apples-to-apples comparison, Etsy's headwinds have been more pronounced compared to e-commerce peer eBay (EBAY). The central issue tugging at Etsy and not at eBay is that Etsy's platform hosts primarily highly discretionary products, including handmade, vintage, and obscure goods. Conversely, eBay has benefited from its Focused Categories, such as trading cards, watches, automotive parts, and consumer electronics. Given the cumulative inflationary pressures over the past few years, consumers' tightened budgets are not prioritizing items on Etsy.

• To contend with these challenges, Etsy is focusing less on near-term consumer conversion and more on creating a better customer experience where its app is a place for discovery. This shift has dented GMS; Etsy estimates the opportunity cost was around a few hundred million dollars in FY24. However, management believes this is the proper step toward building an improved foundation for the long term.
• Etsy began this transformation last year by dialing up what separates it from other e-commerce companies. Etsy is showcasing its over 100 mln unique goods, introducing a quality score by adding indicators of high-caliber listings into its search algorithms, such as positive reviews and on-time shipping. Thus far, this is incentivizing sellers to enhance their customer experiences.
• At the same time, Etsy is enhancing its gifting offering. The company noted that gifting has been core to the platform, ingrained within its discovery flow. During 2025, the company will begin highlighting key gifting moments to drive engagement. Etsy is also placing more emphasis on marketing and bolstering its loyalty program, which offers free shipping.
• Etsy's actions have yet to translate into material gains. In Q4, Etsy posted revenue of $852.16 mln, a meager 1.2% increase yr/yr. Adjusted EPS was a bright spot, jumping significantly to $1.03, exceeding analyst estimates for the first time since 2Q23. Nevertheless, it was insufficient to outshine the cloudy demand dynamics.

Etsy is amid many moving pieces to better contend with an end consumer preferring cheap goods delivered quickly that might linger for an extended period. As such, 2025 is shaping up to be a transition year for Etsy. Against this backdrop, the company must begin stabilizing its sliding GMS growth and deliver notable improvements over the next few quarters to reinstate investor confidence and provide a much-needed jolt to the stock.