Amazon (NASDAQ:AMZN) and Stitch Fix (NASDAQ:SFIX) offer investors two distinct ways to get exposure to e-commerce.

One is a global giant and the dominant online retailer in the U.S, as well as a cloud computing powerhouse, while the other is an upstart trying to disrupt the apparel industry through data-driven personalized styling.

Both stocks have been winners of late: Amazon benefited from the pandemic-driven surge in e-commerce this year, while Stitch Fix has overcome earlier doubts after offering bullish guidance for 2021, and has surged in a short squeeze

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As you can see, Stitch Fix shares have skyrocketed since the company released its recent earnings report, but both have handily outperformed the S&P 500.

As stocks, the principal difference between Amazon and Stitch Fix is their size. Amazon is worth more than $1.5 trillion, is a member of the FAANG stocks group, and is one of the biggest companies in the world by both revenue and market value. Stitch Fix, on the other hand, is still relatively small with a market cap around of $7 billion. In other words, Amazon is valued at more than 200 times the size of Stitch Fix.

Big or small, which one is the better buy today? Let's take a look at what each stock has to offer.

An Amazon warehouse worker in a mask

Image source: Amazon.

Amazon: A world of competitive advantages

Amazon stock has been one of the biggest winners over the last generation. The company has built an impressive network of competitive advantages, and still finds new ways to grow despite already being the second-biggest company in the U.S. by revenue, behind only Walmart. Amazon's sales and profits have surged during the pandemic amid a spike in demand for online shopping, and that trend should bode well for the holiday season as well.

Outside of e-commerce, Amazon continues to make strides into brand-new industries. The company launched Amazon Pharmacy last month, building its earlier acquisition of online pharmacy Pillpack, and the company is building its own telehealth service, the latest indication that it has an eye on the massive healthcare industry. Elsewhere, Zoox, the autonomous vehicle company Amazon acquired in June, just introduced an electric self-driving car that could be a template for an Amazon robo-taxi.

What makes Amazon unique is its aggressiveness in entering emerging industries and technologies. The company willingly sacrifices profit for market share, and because of its reputation for customer satisfaction and its army of third-party sellers and Prime members, it can easily layer on new retail segments like Pharmacy. That's a powerful and enduring competitive advantage, though the company has faced increasing scrutiny from regulators.

A woman holding a Stitch Fix box.

Image source: Stitch Fix.

Stitch Fix: A misunderstood apparel seller

Stitch Fix has taken a unique approach to the apparel industry. Using data science and algorithms, the company sells clothes based on a curated selection chosen by stylists. Most of its sales come from Fixes, or boxes of five items that customers receive, often at regular intervals, buying the items they want and returning the rest. 

Investors have been skeptical of this model as some believe it is faddish, that it only caters to a small addressable market, or it is too difficult to scale, but Stitch Fix has delivered consistent growth throughout its history, with the exception of a brief decline early in the pandemic. That bearishness has been evident in the glut of short-sellers attracted to the stock: 41% of shares were sold short as of the end of November, which helped set up a massive short squeeze after the company released its earnings report, leading the stock to double in two weeks.

The bears seem to misunderstand much of Stitch Fix's business model, as the company is constantly innovating. It recently introduced a program called Direct Buy, which allows customers to shop from a curated selection of clothes based on past picks. Stitch Fix is planning to roll out this platform to new customers next year, which could be a game-changer as it shifts the focus of its business from Fixes to leveraging technology to help customers find the right clothes. Stitch Fix has already seen a favorable response to Direct Buy, and if it takes off with new customers, it will give the company a powerful edge.

A scale with two sets of coins on them.

Image source: Getty Images.

The head-to-head

Stitch Fix and Amazon are competitors on online apparel, of course, and some believe that Amazon will ultimately push out the personalized styling service. According to estimates, Amazon is the biggest apparel seller in the country -- but the company has often struggled in the sector and has faced pushback from third-party sellers, brands like Nike, and at times seems to lack a cohesive strategy in apparel. It tends to do better with basics like underwear and has found fashion items to be more challenging. The company has borrowed from Stitch Fix, introducing Prime Wardrobe, a service that allows shoppers to try before they buy, and more recently it rolled out a personal shopper service for $4.99/month, slightly more than Stitch Fix's $49 annual style pass.

However, Stitch Fix has a significant head start over Amazon in this business, and the company has spent nearly a decade collecting data on customer preferences and honing its algorithms. 

On the recent earnings call, Stitch Fix President Elizabeth Spaulding explained, "Our goal has always been to deliver the most personalized shopping experience to every client, and what has enabled us to do this so well is the nearly 10-year advantage we have building an algorithmically driven engine for highly personalized, apparel-based shopping."

Amazon's entry into personalized styling seems to offer proof of concept here to critics who don't believe that online styling is here to stay. Nonetheless, it's clear that Stitch Fix has the advantage in the category, and it's pursuing a huge addressable market, which it values at over $400 billion, including the U.S. and the U.K. That, along with Stitch Fix's much smaller size, gives it significantly more growth potential than Amazon, which would have to add another $1.6 trillion in market value to double from here. 

Amazon's a great stock -- but if you're looking for a true growth stock, Stitch Fix, on the cusp of disrupting a huge industry, is the better choice.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.