On Sep. 29, Etsy (NAS: ETSY) shares rallied 16% on news that users will be able to purchase items from its platform directly on ChatGPT, saving consumers a step of having to click off the AI search giant’s app.

Why it matters: While ChatGPT has 700 million weekly active users, it can help expand Etsy’s reach. We expect the AI search company to form similar relationships across online retail, potentially cannibalizing traffic from existing channels, such as Google, which would dull the benefits for any individual retailer over time.

  • ChatGPT also announced it will soon provide direct transactions on its platform for wide-moat Shopify (shares were up 6% on the news) customers, and we expect announcements with other retailers to follow, as OpenAI unsurprisingly looks to monetize its network amid heavy investment.

The bottom line: We maintain our $86 per share fair value estimate for wide-moat Etsy, which already factors in a revenue boost from AI. Even after the move higher, shares still trade at a discount.

  • Our 2026 revenue growth forecast of 9% growth sits above the 2% Street consensus (CapIQ), as we assume AI and a healthy economy boost Etsy’s results.

Coming up: The end of tariff exemptions last month on items under $800 shipped to the US from overseas remains an uncertain headwind, given that it represents about 20% of Etsy’s total merchandise volume. We are keen to hear about the financial impact this is having when Etsy reports its third-quarter results.

  • That said, Etsy does have about 60 million items offered in the US, which could serve as alternatives for the international offering.

Etsy’s mobile app and artificial intelligence investments stand to support its network advantage

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of categories in the long tail of unbranded products. Its eponymous core marketplace is filled with artisanal crafts and customizable goods from predominately small, hobbyist sellers, with about 30% of products made to order. While Etsy’s unique inventory is a key differentiator and a point of strength, it has made marketing its fare broadly quite challenging. Recent mobile app and artificial intelligence investments have focused on improving buyer consideration, emphasizing product quality, and improving platform reliability, which we believe is appropriate.

More concretely, Etsy has worked on marketing specific verticals like home decor through marketing and website experience changes, has encouraged mobile app downloads—a higher converting channel—with pop-ups targeting web users, and has rolled out a “gift mode” modality for surfacing ideas for various holidays and evergreen gifting occasions.

Elsewhere, the firm continues to tinker with a loyalty program beta, Etsy Insider, which could help address its frequency issues among its repeat-buyer cohort. At least partially in response to concerns espoused by short-seller Citron Research and its sellers regarding an uptick in mass-produced products on its site, the firm has added listing descriptors for creativity standards, targeted violators of its acceptable listing policies more aggressively, and added a $15 store set-up fee to deter less-scrupulous users. Finally, the firm has increased transparency for sellers with its Search Visibility tool and worked to broker trust with its buyers by rolling out the Etsy Purchase Protection Program.

Overall, we take a positive view of the firm’s approach but note that its super-discretionary product suite leaves management with a limited assortment of levers to pull during a downturn in consumption spending. That said, we believe that the current approach sets the firm up extremely well to capture more than its fair share of discretionary goods spending.

Bulls say

  • Current platform investments like gift mode and a planned loyalty program launch should drive an inflection in GMV growth once consumer discretionary demand starts to recover.
  • After more than doubling its 2019 buyer base, Etsy has likely reached a demand tipping point, with average high-teens active buyer penetration across its core six markets heightening barriers to success for new entrants.
  • The firm’s increased reach in international markets and among customers who identify as men should add long-term legs to Etsy’s active user growth journey.

Bears say

  • Without many high frequency items on its marketplace, Etsy lacks the natural traffic draw that larger e-commerce peers like Amazon command.
  • Local players may have an advantage in international markets, given their nuanced understanding of those cultures and regulation that often favors homegrown companies.
  • Half of the firm’s active buyer base shops on the platform only once per year, and it’s entirely plausible that Etsy’s best efforts will not incite them to visit more frequently, dampening long-term spending per buyer growth potential.

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Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.