Etsy Is Out of the S&P 500. Here’s 1 Great Stock to Buy Instead.

Investors have moved on from former growth stock Etsy (ETSY 2.49%). The niche e-commerce platform hasn’t been able to keep up its pandemic-era growth, and although it’s become more mainstream, it’s struggling to grow.

It was included in the S&P 500 index for the first time in 2020, smack in the middle of its highest growth period, but it was recently removed along with American Airlines and Bio-Rad Laboratories.

Looking for an excellent alternative to Etsy? Consider Amazon (AMZN -1.67%) instead.

Should Etsy be out of your portfolio?

The powers that be at the S&P 500 removed Etsy because it’s too small for the index, which is focused on large-cap stocks. It was placed instead into the S&P SmallCap 600. Etsy was on fire when it originally joined the index, but it’s lost 56% of its market cap since then and has a market cap of $6.3 billion at the moment. The announcement didn’t have much of an impact on Etsy stock, which is down 33% year to date.

It’s not necessarily a vote of no confidence in Etsy; it’s just how this index works. The vote of no confidence is coming from the market. Etsy has been struggling to grow its business in the aftermath of unexpected pandemic success, and various initiatives have failed to reignite momentum.

Etsy could still turn around. Economic headwinds are likely to be a factor in its performance of late, and lower interest rates should boost sales. Revenue is still growing, but without a new global pandemic, they should proceed at a steady pace. Etsy is highly profitable, it has a niche e-commerce platform that services a loyal community, and the stock is cheap, trading at forward P/E ratio of 11.

However, if you’re looking for a high-octane e-commerce stock to supercharge your portfolio, look no further than Amazon.

No match for the king of e-commerce

Amazon likes to have its finger in many pies, and if there are challenges to its platform, it takes them on. So when Etsy became a popular marketplace for handmade items, Amazon launched a competing platform called Amazon Handmade.

To Etsy’s credit, Amazon’s venture did not knock it out of the running. That speaks to Etsy’s strength.

But it also speaks to Amazon’s. It can enter any area where it sees an opportunity and become an instant player. If handmade goods are doing well, why should Amazon lose out?

That’s kind of like a guiding principle for Amazon. Wherever there’s an opportunity that fits into its platform, Amazon will go after it. That’s how it entered cloud computing, which has become one of its most important segments; it had the tech capabilities and experience to develop it into a very profitable business today. And it’s taking that a step further with its generative artificial intelligence (AI) business that’s geared toward the Amazon Web Services (AWS) cloud computing segment.

Inclusive of Etsy’s incredible initial jump, it’s down 3% over the past five years at the same time that Amazon stock is up 122%.

ETSY data by YCharts

Opportunities in e-commerce and more

Ultimately, buying Amazon stock is a vote of confidence in so much more than its e-commerce platform, although that’s one reason to buy it. Just like it faced Etsy head-on, it doesn’t miss an opportunity to innovate and improve wherever it can.

One of its more recent e-commerce products is called Buy With Prime, which gives third-party vendors the ability to use Amazon checkout on their direct-to-consumer websites. That’s a win-win for both sides, since third-party vendors can leverage Amazon’s network to facilitate payments and quick deliveries, while Amazon gets a cut of the sale.

It’s also offering advertising opportunities for third-party vendors to bring shoppers to their sites, another way for Amazon to take a higher share of the sale. It recently made its first-ever deal with PayPal to feature it as a payment option for Buy With Prime.

E-commerce keeps growing as a percentage of retail sales, reaching 19.7% last year according to Statista. It’s expected to reach 20.7% in 2024 and keep gaining share through 2027. Those organic growth opportunities will benefit Amazon more, perhaps, than any other company.

Amazon has plenty of growth prospects in e-commerce, cloud computing, streaming and more, and it’s an excellent choice for almost any investor.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Etsy, and PayPal. The Motley Fool recommends the following options: short September 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy.