Better Buy: Netflix vs. Amazon
Amazon.com (NASDAQ: AMZN) and Netflix (NASDAQ: NFLX) have beaten all but a handful of stocks over the last decade, and the two tech darlings have captured investors' imagination like nothing else during that time.
It's clear why. Amazon has returned in excess of 3,000%, while Netflix shares have surged more than 6,000% in that time. Both companies have come to dominate their respective industries, e-commerce and video streaming, and have essentially been unchallenged by any other company. They have also regularly put up annual revenue growth rates of 20%, 30%, or even 40%, and have rewritten the rules in retail and video entertainment.
Investors in these stocks today shouldn't expect returns in the 1,000% range, as both companies are much larger than they were a decade ago, but they're still growing briskly, and continue to attract plenty of attention, especially after both stocks have pulled back in recent months.
Let's take a closer look at these two tech titans to see which one is the better buy today.
A global leader facing new competition
Netflix's growth has consistently frustrated bears and naysayers who seem to think the company will eventually face insurmountable competition, or that it will never be able to deliver the profits to justify its valuation.
Still, Netflix's growth shows no signs of abating. The company has added more than 27 million subscribers over the last four quarters, its best 12-month subscriber addition total ever, and now has 137 million subscribers around the world. Revenue growth remains strong as well following a recent price hike, increasing 36% in the third quarter.
That better-than-expected subscriber growth propelled Netflix shares up as much as 120% this year, though the stock has since given up much of those gains as investor sentiment has cooled on high-growth tech stocks in recent months.
Although subscriber growth remains strong, other investor concerns have arisen for this high-priced stock that trades at a P/E of 99. For instance, in its third-quarter earnings call, Netflix said it would burn through $3 billion to $4 billion in free cash flow next year, and that it would take a few more years to reach breakeven, though CFO David Wells stressed that the company was optimizing for long-term free cash flow and long-term profitability. That strategy will also cause Netflix to take on more debt, which adds risk, especially as the logic underpinning Netflix's borrowing strategy seems questionable.
Perhaps more concerning for Netflix is the rising tide of competition that seems to be coming its way. Disney is set to launch its Disney+ streaming service next year, which will also mean the end of Disney properties like Marvel, Pixar, and Star Wars movies appearing on Netflix. Disney's acquisition of Twenty-First Century Fox will also give it majority control of Hulu and even more firepower in the streaming wars. Meanwhile, AT&T, now that it's taken HBO parent Time Warner under its umbrella, is angling to launch its own streaming service, which could also mean that Netflix would lose some of its most popular content.
Netflix's recent decision to pay AT&T $100 million for the exclusive rights to stream Friends for just one year shows the value that such popular franchises from broadcast television, like The Office and How I Met Your Mother, bring to streaming services like Netflix, and it's difficult, if not impossible, to replace the value of a show like Friends with original content. One of the disadvantages of the streaming model is that it's much more difficult for streaming-only shows to permeate the cultural zeitgeist the way series like Friends and The Office have.
Slowing revenue growth but surging profit
Amazon is at an inflection point in its history. For nearly 25 years since its founding, the e-commerce giant has operated at near breakeven, plowing whatever profits it may have had into expansion and experimentation in order to deliver long-term revenue growth. However, thanks to the strength of segments like its Amazon Web Services cloud computing division, its third-party marketplace, and an emerging advertising business, the company has seen profits skyrocket this year. Through the first three quarters of 2018, net income has jumped from $1.2 billion to $7 billion, and in the third quarter net income increased by more than 1,000%.
However, that profit growth comes just as Amazon's top-line growth seems to be slowing down. In its fourth-quarter earnings report, it forecast net sales growth of 10% to 20%, a significant slowdown from recent quarters. Part of that is due to its lapping the Whole Foods acquisition in August 2017, but the company is also seeing Prime membership growth slow, as it's already attracted 100 million members to the service. And given that Amazon is on track to ring up $230 billion in revenue this year, growing the top line by 20% means adding almost another $50 billion in revenue -- no small feat.
Still, the company's network of competitive advantages looks as strong as ever, and it continues to earn high marks for customer satisfaction. In a recent Georgetown University survey, it even ranked as the second-most-trusted institution in the U.S. after the military. (Alphabet's Google was No. 3.) Meanwhile, Amazon also continues to push the envelope in new industries and technologies like drone delivery, voice-activated technology with Alexa, and its cashier-less Amazon Go stores. And the company seems to be developing an interest in healthcare with its acquisition of PillPack and its joint venture with Berkshire Hathaway and JPMorgan Chase to start a healthcare company.
While the law of large numbers seems likely to restrain Amazon's revenue growth, the sudden profit growth should continue as the company is just starting to leverage the power of its many competitive advantages.
Who's the better buy?
Both Amazon and Netflix continue to hold appeal for investors given their history of outperformance and track record of industry disruption. Both companies also trade at similar valuations and have comparable expected growth rates, making them alluring to the same type of growth investor. However, Amazon looks like a safer bet than Netflix, given each company's current position.
Netflix is taking on billions in debt each year to fund its aggressive content strategy but is facing a new level of uncertainty and a test unlike it's ever seen, as Disney and AT&T launch competing services and take content off its platform. Amazon, on the other hand, faces no immediate threat in e-commerce, and its cloud computing division continues to put up impressive growth. Its set of competitive advantages simply looks stronger than Netflix's at this point.
As the smaller company of the two, Netflix arguably has the greater upside potential, especially given murmurs of a potential entry into movie theaters, but it also looks considerably riskier than Amazon. All things considered, Amazon looks like the better bet today.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman owns shares of Amazon, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Berkshire Hathaway (B shares), Netflix, and Walt Disney. The Motley Fool has a disclosure policy.