Last Updated Nov 8, 2017 12:28 PM EST
The holidays are heating up in the world of homemade crafts.
Etsy (ETSY) has built a company with $365 million in annual revenue by charging crafters to list handmade items like Harry Potter scarves and personalized mason jars. But online retailing giant Amazon (AMZN) is pushing farther into Etsy's bailiwick with the its new Handmade Gift Shop, which seeks to lure craft-minded holiday shoppers.
That sets up the two companies to square off over what may be the biggest holiday season yet for online shoppers. Etsy is rebounding after a rough patch following its 2015 initial share offering, when its stock declined and sellers grew frustrated with the business.
Earlier this year, it brought in a new CEO, former Skype CEO Josh Silverman, who's taking a more businesslike approach to running the craft marketplace, said D.A. Davidson analyst Tom Forte, who has a "buy" rating on Etsy shares.
The battle between Amazon and Etsy has been brewing for two years, when the e-commerce juggernaut debuted its Handmade service. Amazon often tests services and will get out of a category if it's not paying off, Forte said.
"That suggests that Amazon likes something about it," Forte said. "They appreciate that it's expanding their assortment, because Amazon wants to be the place where people go to buy everything."
Granted, Etsy's business is small artisanal potatoes compared with Amazon's, whose sales reached $136 billion last year. Etsy's "gross merchandise sales," or the value of all the transactions made through its site, was $2.84 billion in 2016. Amazon first entered Etsy's arena in 2015, offering lower fees for many sellers than its smaller rival was at the time.
Asked about how Etsy views Amazon's efforts to elbow in on its turf, Etsy CEO Silverman said he believed his site remained "the place to go when you're looking for things you're not going to find everywhere else."
"Etsy has over 45 million items from 1.9 million sellers," he added. "There's no one in the market that's even within an order of magnitude of that for the type of product that we offer. So we think we've got a really unmatched advantage in selection."
He added, "Brands mean something. I think buyers come to experiences to find a curated set of selections and to have a shopping experience that they think is different or relevant for them."
While Amazon has marketing muscle behind it, Etsy continues to weave a hold on craft-minded buyers, Forte said.
"A consumer goes to Amazon for what is cheapest and fastest," he said. "Etsy is offering artisanal products that aren't the cheapest and aren't available in two days."
Still, investors and analysts will be watching Etsy's fourth quarter. Wedbush analyst Aaron Turner wrote in a research note that there are concerns about "decelerating growth in the U.S. business."
On Monday, Etsy said it expects 2017 revenue to increase as much as 20 percent. The fourth quarter, as it is for many other retailers, represents the craft marketplace's busiest time of the year. That means investors will be closely watching whether Amazon can put a dent in Etsy with its Handmade expansion.