Etsy (NASDAQ:ETSY) pioneered the niche market of handmade merchandise in the e-commerce world. Since its inception 10 years ago, the Internet upstart has evolved into the go-to spot for one-of-a-kind goods that can't be found elsewhere. However, that could change now that the world's largest online retailer is getting into the business. Amazon.com (NASDAQ:AMZN) officially rolled out Handmade, a site meant to directly compete with Brooklyn-based Etsy, earlier this month.

Let's take a closer look at how the two online marketplaces stack up and whether this creates unnecessary risk for would-be Etsy investors.

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There's a reason businesses big and small quiver with fear when Amazon enters their respective markets. The e-commerce giant has built a retail outfit with some of the most competitive prices on the planet and a logistics operation that boasts unlimited two-day shipping for just $99 per year. Amazon now boasts a mind-blowing 285 million active users because of its competitive offerings. Moreover, the company has grown its user base at a compound annual growth rate of 21% over the past five years, according to Morningstar.

These advantages in scale should keep Etsy up at night. For comparison, Etsy has 21.7 million active users today. This means that its customer base is roughly 7% the size of Amazon's buyer base. Active buyers are defined as consumers who have made at least one purchase on the site in the past year. This outsized traffic to Amazon's site could entice Etsy sellers to start peddling their goods on Handmade at Amazon.

The Goliath of e-commerce started poaching sellers from Etsy back in May, according to The Wall Street Journal. Amazon reportedly sent hundreds of invitations to Etsy sellers enticing them to join the new service. Etsy sellers would increase the number of eyes on their products from tens of millions to hundreds of millions by switching to Amazon. However, there are pros and cons for sellers on both sites.

Weighing the pros and cons
For starters, to sell on Amazon Handmade the products must be, well, handmade. This differs from Etsy, which earlier this year said vendors could sell items that were made by third-party manufacturing partners. Because Amazon's service is still in its infancy, the site only has about 80,000 items for sale today compared to around 32 million for sale on Etsy.com. It may be harder for Amazon to grow its product selection to rival that of Etsy's if it plans to only include "handmade" items going forward.

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Image source: Etsy.

Selling your goods on Amazon Handmade will also cost you nearly four times as much as selling on Etsy's marketplace. The Everything Store will charge a 12% "referral fee" on each item you sell and you may need to pay an additional $39.99 per month on top of that if you sell more than 40 products each month. Those rich commissions may prove too costly for sellers who are making each item themselves. Etsy, on the other hand, charges a 3.5% fee per item sold and a $0.20 listing fee.

Amazon said it would waive the monthly fee until Aug. 2016. This should help attract sellers in the near term, but it will be interesting to see how many merchants stick around. It's likely that many artisans will continue selling on Etsy while also hawking their goods on Amazon's new site given the cost advantage. However, this could prompt vendors to sell similar hand-crafted items on Amazon Handmade for slightly higher prices than on Etsy in order to help offset inflated seller fees.

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image source: Amazon.

Etsy shouldn't lose many vendors outright to Amazon since most are likely to sell on both sites. And customers should continue to shop Etsy.com as long as they can keep pricing and selection competitive. However, keeping investors interested could be the real problem for Etsy amid increased competition from Amazon.

Taking stock of the situation
Etsy hit the public markets earlier this year with an outpouring of support as Wall Street pushed the stock higher by as much as 87% on its first day trading. The company made its stock market debut at $16 per share, but quickly ran up to $30 a share. Unfortunately, it has since come crashing back to reality. It's down more than 63% year to date and currently trades around $10 apiece.

The problem is investors' waning confidence in Etsy's business and its lack of profitability. The company reported a net loss of $6.4 million for its second quarter or more than double its loss from the year-ago period. Etsy is also heavily spending on the sales it's generating, which could continue to weigh on earnings in the quarters ahead. Operating costs surged more than 49% year over year on higher marketing expenses.

Etsy plans to continue to spend on marketing and advertising efforts to boost revenue growth. This, together with increased competition from none other than Amazon, adds another dimension of risk to the stock. Ultimately, it could have further to fall if Etsy isn't able to rein in costs and improve its earnings potential going forward. Therefore, I believe there are less risky stocks available to investors today in the e-commerce space.

Tamara Rutter owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool owns shares of Etsy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.