Shopify (NYSE: SHOP) and Etsy (ETSY -0.22%) are two of the most promising stocks in e-commerce today, and it's easy to see why the same investor might like both of them. Each one is a leader in its respective e-commerce niche, Shopify in software and Etsy as the online marketplace for handmade and other unique items.

Both stocks have been hammered this year as e-commerce growth has slowed, but they seem to have bottomed out in recent months. So which is the better buy today? Keep reading to see what two of our Motley Fool contributors think.

A woman opening up a package.

Image source: Getty Images.

Riding the e-commerce wave

Parkev Tatevosian (Shopify): Shopify is helping merchants create and expand their online presence. This became essential after the onset of the pandemic as non-essential businesses were forced to shut their doors to in-person shoppers. Unsurprisingly, sales and customer signups boomed for Shopify. That said, it was succeeding even before the outbreak. Between 2012 and 2019, revenue exploded from $24 million to $1.6 billion.

Merchants have several choices when deciding how to establish and maintain online sales. They can list on Amazon, and many do, but that outsources customer relationship opportunities that businesses would like to capture, not to mention the hefty fees Amazon charges as a percentage of sales.

The flip side is that Amazon handles fulfillment and attracts millions of shoppers. In recent quarters, Shopify has invested billions of dollars in building out its own fulfillment network to rival Amazon. Of course, it will not reach Amazon's scale, but it is mitigating one major reason merchants may choose Amazon over Shopify.

Unfortunately, the investment in fulfillment might hamper Shopify's excellent progress in expanding profitability. From 2019 to 2021, its operating income went from a loss of $141 million to a profit of $269 million. It remains to be seen if these investments in fulfillment will deliver sufficient returns, but given management's history of solid performance, the chances are good that it will.

Investing in growth is prudent when operating in an expanding industry. In the boom year of 2020, e-commerce sales as a percentage of overall sales in the U.S. totaled 14%. According to Statista, that figure is estimated to rise to 22% by 2025. Intuitively, that makes sense. Shopping online offers advantages that brick-and-mortar businesses can do little to match.

SHOP Chart

SHOP data by YCharts.

At a price-to-sales ratio of 8.6, investors have scarcely had an opportunity to buy Shopify stock at a lower price. 

A unique strategy in e-commerce

Jeremy Bowman (Etsy): There's no question that Etsy has struggled this year. Gross merchandise sales, or the total dollar value of merchandise sold on its platform, actually declined in its most recent quarter as the company faced difficult comparisons with its surge during the pandemic.

But there is good reason to believe that e-commerce growth will normalize to its pre-pandemic trajectory, when it was growing around 15% annually in the U.S., since there's still a lot of room for growth in online retail.

While both Etsy and Shopify seem to have promising growth opportunities, Etsy has some important advantages over Shopify. First, Etsy is solidly profitable with a 28% margin in earnings before interest, taxes, depreciation, and amortization (EBITDA) in its most recent quarter. And the company is normally profitable on the basis of generally accepted accounting principles (GAAP) as well. But a large goodwill impairment spoiled its profit in its most recent quarter.

Etsy owes its profitability to its highly scalable marketplace model where it collects commissions on sales on its platform, as well as from add-on features like payments and ads. 

It has another crucial advantage over Shopify. While Shopify is battling Amazon to grow in the more-general e-commerce category, Etsy faces little direct competition in its niche: handmade and vintage products. It has also leveraged that position with acquisitions, including Reverb, a musical instruments marketplace; Depop, a used- and vintage-clothing site; and Elo7, a Brazilian version of Etsy. 

The company calls this its House of Brands strategy, and it believes it can apply the same successful tactics to these brands that it did to Etsy.

Looking ahead, Etsy is penetrating a large addressable market, and the authenticity of its site and uniqueness of its merchandise are on trend with what millennials and Gen-Zers are looking for now. The company is profitable and faces little direct competition. It looks well-positioned to outperform.