Etsy (ETSY 0.74%) and MercadoLibre (MELI 0.85%) are both e-commerce companies whose stocks generated much bigger gains than Amazon's(AMZN 0.78%) over the past five years. Amazon's stock rose more than 300% during that period, but Etsy's stock skyrocketed roughly 1,700% as MercadoLibre's stock jumped nearly 900%.

Both companies have also withstood competition from Amazon. Amazon launched its own Handmade marketplace to challenge Etsy back in 2015, but its stricter rules and higher fees alienated many merchants. Amazon expanded its operations in Latin America over the past decade, but it still remains far behind MercadoLibre, the region's largest e-commerce player.

An online merchant takes a picture of a pair of shoes.

Image source: Getty Images.

Etsy and MercadoLibre both generated strong growth throughout 2020 as online orders accelerated throughout the pandemic. But both stocks have also declined since the beginning of the year as investors rotated from growth to value stocks and focused more on reopening plays.

Should investors take the opportunity to buy these two e-commerce stocks? Let's take a fresh look at both companies to see which is the better investment in this rough market for growth stocks.

Etsy's growth should cool off this year

Etsy's revenue and adjusted EBITDA rose 36% and 34%, respectively, in 2019. But in 2020 its revenue soared 111% to $1.73 billion as its adjusted EBITDA jumped 195% to $549 million.

Etsy's growth accelerated as more people shopped online during the pandemic, more merchants joined the platform, and it integrated the online instruments marketplace Reverb, which it acquired in Aug. 2019. It also benefited from strong sales of handmade masks throughout the crisis.

Etsy's new offline ads, integrated videos, personalized recommendations, and "buy now, pay later" options all boosted its engagement rates. Its decentralized network of buyers and sellers also enabled it to avoid the clogged supply chain and logistics arteries of larger retailers.

In the first quarter of 2021, Etsy's revenue rose 142% year-over-year to $551 million as its adjusted EBITDA grew 243% to $184 million. Its active buyers grew 90% to 90.7 million, its active sellers rose 67% to 4.7 million, and its gross merchandise sales (GMS) climbed 132% to $3.14 billion.

But for the second quarter of 2021, Etsy expects its revenue to rise just 15%-25%, and for its adjusted EBITDA to dip 4%-14%. That slowdown can be attributed to tougher post-pandemic comparisons, lower sales of face masks, and its lapping of the Reverb acquisition. For the full year, analysts expect its revenue and adjusted earnings to rise 32% and 15%, respectively.

But in early June, Etsy announced it would buy the fashion resale marketplace Depop for $1.6 billion. Etsy expects the deal to boost its revenue but dilute its adjusted EBITDA after it closes in the third quarter, so investors should expect some slight guidance revisions in the near future.

MercadoLibre faces a milder post-pandemic slowdown

MercadoLibre's three largest markets are Brazil, Argentina, and Mexico. Many of those markets are struggling with rampant inflation, which reduces MercadoLibre's reported growth in U.S. dollars.

Despite those challenges, MercadoLibre's revenue still rose 60% to $2.3 billion in 2019 -- but its net loss widened from $37 million to $172 million as it ramped up its investments in new services. In 2020, its revenue soared 73% to $3.97 billion and its net loss narrowed to just $707,000.

MercadoLibre's growth in its three top markets accelerated significantly in the second half of the year as the worsening pandemic forced more people to shop online. Its digital payments platform, Mercado Pago, also gained more users as cash-based payments declined throughout the crisis.

In the first quarter of 2021, MercadoLibre's revenue increased 111% year-over-year to $1.4 billion (158% in constant currency terms) as the pandemic continued across most of its markets. Its number of unique active users rose 62% to 69.9 million as its gross merchandise volume (GMV) and total payment volume (TPV) rose 114% and 192%, respectively, in constant currency terms.

But its net loss widened again, from $21 million to $34 million, as it expanded its logistics network and payments ecosystem. Analysts expect its revenue to rise 58% for the full year with a slim profit.

The valuations and verdict

Etsy and MercadoLibre both have plenty of growth potential. Etsy will likely remain the niche leader in handmade goods and unique gifts, and MercadoLibre will benefit from rising income levels and internet penetration rates across Latin America.

But Etsy's stock trades at just 45 times forward earnings while MercadoLibre's stock has a frothy forward P/E ratio of nearly 270. Neither stock is cheap relative to its top-line growth—Etsy trades at nine times this year's sales, while MercadoLibre trades at eleven times this year's sales.

MercadoLibre's growth potential might justify its higher valuations, but I believe stocks like Etsy -- which offers a better balance of growth and value -- should fare better in this fickle market than pricey and unprofitable "hyper-growth" companies like MercadoLibre.