Diabetic nephropathy, with high prevalence, is the main cause of renal failure in diabetic patients. The strategies for treating DN are limited with not only high cost but an unsatisfied effect. Therefore, the effective treatment of DN needs to be explored urgently. In recent years, due to their self-renewal ability and multi-directional differentiation potential, stem cells have exerted therapeutic effects in many diseases, such as graft-versus-host disease, autoimmune diseases, pancreatic diseases, and even acute kidney injury. With the development of stem cell technology, stem cell-based regenerative medicine has been tried to be applied to the treatment of DN. Related stem cells include embryonic stem cells, induced pluripotent stem cells, mesenchymal cells, and endothelial progenitor cells. Undoubtedly, stem cell transplantation has achieved certain results in the treatment of DN animal models. However, stem cell therapy still remains certain thorny issues during treatment. For instance, poor engraftment and limited differentiation of stem cells caused by the diabetic microenvironment, differentiation into unwanted cell lineages, and malignant transformation or genetic aberrations of stem cells. At present, various researches on the therapeutic effects of stem cells in DN with different opinions are reported and the specific mechanism of stem cells is still unclear. We review here the potential mechanism of stem cells as new therapeutic agents in the treatment of DN. Also, we review recent findings and updated information about not only the utilization of stem cells on DN in both preclinical and clinical trials but limitations and future expectations of stem cell-based therapy for DN.