Amazon (NASDAQ:AMZN) has crushed many retailers in recent years, but it repeatedly failed to loosen Etsy's (NASDAQ:ETSY) grip on the handmade goods market. Amazon challenged Etsy with its Handmade marketplace in 2015, but Etsy's first-mover's advantage, easier sign-up process, lower commissions, and relaxed rules regarding mailing lists and promotions held Amazon at bay.

Amazon owns a much larger e-commerce platform than Etsy, and its higher-margin AWS (Amazon Web Services) cloud platform subsidizes the growth of its lower-margin marketplaces. That virtuous cycle lifted its stock nearly 470% over the past five years.

Etsy's stock rose about 330% during the same period as it expanded its base of buyers and sellers in Amazon's shadow. Etsy isn't boosting its profits with a secondary cloud business like Amazon, but it also isn't shackled to a lower-margin fulfillment network. Instead, Etsy is merely a listing platform that connects artisans to customers -- and it asks merchants to fulfill their own orders.

Three tiny parcels on a laptop keyboard.

Image source: Getty Images.

Amazon and Etsy's businesses are fundamentally different, but both e-commerce stocks are outperforming the broader market. Is either stock worth buying after their multibagger returns? 

How fast is Amazon growing?

Amazon's revenue and earnings rose 20% and 14%, respectively, in 2019. Its revenue in the first quarter, which bore the impact of COVID-19, grew 26% annually as homebound shoppers purchased more products online. The growing use of cloud and streaming services throughout the crisis also boosted its AWS revenue, which rose 33% annually and outpaced the growth of its North American and International businesses.

However, Amazon's EPS fell 29% as the costs of dealing with COVID-19 squeezed its operating margin. It spent over $600 million battling COVID-19 with investments in safety equipment, tests, and training for employees during the first quarter, and it expects that figure to surge past $4 billion in the second quarter.

Amazon expects its revenue to rise 18%-28% annually in the second quarter, but for the midpoint of its operating profit to merely break even on higher COVID-19 costs, which will likely result in a net loss. Amazon didn't provide an outlook for the full year, but analysts expect its revenue to rise 22% and for its earnings to dip 6%.

How fast is Etsy growing?

Etsy's revenue and earnings rose 36% and 25%, respectively, last year. Its revenue grew another 35% annually in the first quarter, but its net income tumbled 60% due to its acquisition of the musical instruments marketplace Reverb, currency headwinds, and a deceleration in marketplace orders as COVID-19 shut down businesses in March. But its adjusted EBITDA, which excludes most of those one-time expenses, grew 10%.

Handmade necklaces.

Image source: Getty Images.

Etsy's outlook for the rest of the year is volatile. The growth of its handmade marketplace is slowing down, but Reverb became a primary retail channel for musical instruments as brick-and-mortar stores temporarily shut down. Etsy expects Reverb's growth spurt to boost its revenue 70%-90% annually in the second quarter.

That momentum won't last for very long, since Etsy will lap the acquisition of Reverb in the third quarter just as other musical instrument retailers reopen. Etsy didn't provide any guidance for the full year, but Wall Street expects its revenue to rise 20% and for its EPS to tumble 45%. However, Etsy's adjusted EBITDA margin expanded sequentially in the first quarter after it consolidated Reverb's financials -- so its core business remains resilient.

Does either stock deserve a premium valuation?

Amazon and Etsy both trade at about 100 times forward earnings. The bulls will claim Amazon's dominance of the e-commerce and cloud markets, and Etsy's defensible niche in handmade goods, justify those premium valuations.

The bears will note Amazon's e-commerce business faces stiff competition from Walmart and Target, that AWS is growing at a slower clip than Microsoft's Azure, and that it remains a popular punching bag for politicians and regulators. As for Etsy, the bears will claim that a pandemic-induced recession could cripple sellers by reducing consumer demand for handmade gifts.

COVID-19 is causing a lot of visibility issues, but I believe both stocks will recover quickly after the pandemic passes. If I had to choose one stock over the other, I'd stick with Amazon, since it has a better-diversified business, a more expansive ecosystem with over 150 million Prime subscribers, and and a wider moat than Etsy. Those strengths offset Amazon's temporary weaknesses, and indicate its stock will head higher over the long term.