6 Stocks to Buy Before Netflix

Normally in this series, I give you a few companies to consider before buying a popular stock. The idea is to show these other possibilities to combat the problem of getting too excited about a stock and buying on emotion. Frequently, the featured stock is one I like.

But that's not the case with Netflix (Nasdaq: NFLX  ) . No matter how many conversations I have with fellow Fools who regale me with arguments revolving around its innovation, its strong culture, its customer focus, Reed Hastings' dreamy countenance, and the company's goals of dominating the living room, I just can't see paying a huge premium for Netflix stock.

I see the company's 16.9 million subscribers (and growing) and I see its bold moves to transition from DVD to streaming. I'll grant you that it seems to be doing all the right things -- all the things AOL failed to do 10 years ago. But a lot of that action is defensive, not growth-oriented.  If I'm paying 74 times earnings, I want a clear path to enormous growth.

So today, I'm not just going to throw out names for consideration. I'm going further, by naming six high-growth, high-priced stocks I'd rather buy than Netflix. These are companies I have on my watchlist. I'd prefer them at cheaper prices, but I'd buy each of them today over Netflix.

Amazon.com (Nasdaq: AMZN  )
Amazon is also trading above 70 times earnings, and analysts expect five-year growth of a little less than 30%. But I would much rather have Amazon. It absolutely dominates online retailing and has some cloud-computing upside to boot. And by the way, on the side, it competes with Netflix with its online media offerings.

Amazon can grow not just through the rise of the Internet and online retailing but also by eating its competitors' lunches. This is a growth story I get excited about.

Morningstar (Nasdaq: MORN  )
Since The Motley Fool is in the investment-research space, too, I can really appreciate Morningstar's business model. There's a reason Tom Gardner has recommended it in our Stock Advisor newsletter service --these guys know how to run a quality shop.  

Starbucks (Nasdaq: SBUX  )
I think Starbucks' heady growth days are behind it, and I don't believe it should sell for growth-stock prices. But it is a quality company that I'd rather own than Netflix.

Apple (Nasdaq: AAPL  )
The thing with Apple is that its profits have been able to keep up with its share-price growth -- it trades at less than 15 times next years' earnings. Apple is almost 30 times the size of Netflix, so growth is theoretically harder, but no one has been able to scale up selling high-margin hardware the way Apple has. Apple's stock price has almost quadrupled in less than two years, but I wouldn't bet against its continued rise.

Chipotle (NYSE: CMG  )
Just as others cry about selling Netflix too soon, I sold Chipotle way too early. I'd love to get back in one day.

Intuitive Surgical (Nasdaq: ISRG  )
This is the only stock in this article that I own. Although I sold Chipotle too early on valuation concerns, I refuse to do so with Intuitive Surgical. With the company at pretty much the same market cap as Netflix, I'm just much more willing to pay up for a company that can revolutionize surgery through robotics than a company that's trying to stream content other people own.  

The takeaway
Bottom line, I'm just not excited about Netflix at current prices. Take that for what it's worth. I could be wildly wrong, and look forward to reading your best arguments in the comments section below.

I think all of the alternatives to Netflix I've mentioned here are quality companies. I'm waiting for price dips to buy into them (or, in Intuitive Surgical’s case, to buy more shares), but with a gun to my head, I'd buy each of them over Netflix at today's prices.

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Anand Chokkavelu owns shares of Intuitive Surgical. Chipotle and Intuitive Surgical are Motley Fool Rule Breakers recommendations. Apple, Amazon.com, Morningstar, Netflix, and Starbucks are Motley Fool Stock Advisor picks. Chipotle is a Motley Fool Hidden Gems selection. The Fool owns shares of Apple, Chipotle, and Morningstar. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (8) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 11, 2010, at 3:19 PM, iamtellingu wrote:

    NFLX is just crazy! I agree with your comments and stock picks.

  • Report this Comment On December 11, 2010, at 3:24 PM, goalie37 wrote:

    I agree on ISRG. It's been hard to watch the price drop so much over the last few months, but I think the current valuation is much more logical.

    I love AMZN and hope to own it again someday, but the price just doesn't make sense right now. Regardless of future earnings growth, I can't see them trading above 70 times five years from now, meaning growth will outpace the stock under even the best case scenario.

  • Report this Comment On December 11, 2010, at 3:24 PM, passa3m wrote:

    I wholeheartedly agree. Netflix was rewarded for its innovation a long time ago. It's P/E valuation is outrageous. It's stock price was under $100 per share 6 months ago! Sooner or later, the fundamental analysis on a stock proves successful to move a stock, (remember regression to the mean!) to its reasonable valuation. Also, with its valuation, Netflix could lose 20-30 points in a day! Don't think so? Watch it happen!

  • Report this Comment On December 12, 2010, at 11:04 AM, angellt wrote:

    DEar Sirs:

    Your comments are without any analitical foundation. You can not based p/e analysis only when you valuate the earnings growh potential of a corporation.

    Rember when people said that Microsoft was overvalued in the 80s, Apple and Goog in this century?

    Angel

  • Report this Comment On December 13, 2010, at 11:29 AM, wyrdmage wrote:

    I still own every stock mentioned in this article because I follow David Gardner's advice to let winners run (I learned through being burned by selling other stocks too soon). I believe that buying the running winner Netflix now would be a 50/50 chance: just as much chance of that investment increasing as there is in it decreasing.

  • Report this Comment On December 13, 2010, at 3:48 PM, pllntooz wrote:

    Do you have any actual reasons other than emotion for why these stocks are better investments than NFLX?

    Your reasons for AAPL, SBUX, CMG are emotions, not investment theses.

    Your reasons for AMZN, and MORN, are barely investment theses. And your rationale for ISRG is based on what they'd like to do, rather than what they are doing.

    Very, very weak analysis, sir. I'm disappointed.

  • Report this Comment On December 13, 2010, at 5:13 PM, jmbring wrote:

    hey Paul:

    <i>Do you have any actual reasons other than emotion for why these stocks are better investments than NFLX?</i>

    thing is, i haven't heard anyone bullish on NFLX at today's price to be relying on actual analysis either.

    'fess up bears and bulls, what we're talking about here is SPECULATION.

    no, the current value doesn't make sense, and Netflix has to go even further than typical estimate crushing and find amps that go to 11 to keep up with expectations.

    bulls are betting the management team will find more magic; bears either think the opposite or refuse to bet. either way we're talking about a guess.

    i suspect if one were to use history as a guide, the number of companies on a similar pinnacle that have fallen is greater than those that continued to rock.

    Netflix makes up a chunk of my holdings now, and i'm very thankful for the runup. no, i haven't sold any, i'm still thinking. my own hunch is streaming success will not be as easy as DVD for many reasons, and i don't enjoy holding stocks just because management is good...

    mark

  • Report this Comment On December 17, 2010, at 8:50 PM, age82 wrote:

    NFLX has been a big winner and it's hard to part with but I sold 60% of my investment but I plan to keep and follow the remains closely. I bought Apple with the sale money.

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