Earnings Season Smackdown: Netflix vs. Apple

Both Netflix  (NASDAQ: NFLX  ) and Apple  (NASDAQ: AAPL  ) reported earnings on Wednesday night. The holiday quarter was a crucial period for both companies, because they had much to prove. We all know how the drama played out: One stock passed the test but the other was found lacking.

Netflix crushed expectations and soared 40% higher on Thursday; Apple failed to impress investors and plunged 12% instead.

Shock! Horror! Panic at the disco!
Casual market watchers and even some professionals were flabbergasted. Twitter was awash in outraged protests.

@PhilTyman tweeted: "Apple (AAPL) loses $60 Billion in value after earning almost $14 Billion while Netflix (NFLX) gains $2 Billion from earning $7 Million."

"$AAPL had a $13B profit and lost $50B in market cap. $NFLX had an $8 MILLION profit and GAINED $2 BILLION in market cap. #EfficientMarkets," was the takeaway from @StadlerStocks.

"What kind of market is this where $AAPL gets hammered and we bid NFLX up to 164 a share???" wondered @iJustReally. "no position in either but my god."

The cries for sanity continue today as Netflix climbed another 12% as of this writing while Apple stayed put near 52-week lows. Netflix is reaping the temporary rewards of a short squeeze today as brokers issue margin calls to hordes of suffering short-sellers. The squeeze effect won't last, so be prepared to take some profits off the table now if you're a short-term trader.

Me, I'm perfectly happy holding Netflix for the long term and staying far away from Apple. This week's dramatic action only confirmed my investment theses on both stocks. I fully expect Netflix to move up from here in the long term, and I'm pretty sure that Apple peaked in 2012.

Are you crazy?
No really, I saw both of these moves coming and tried to warn you several times. Apple has been sending distress signals via its sagging supply chain for months, marking the chalk outlines of softening iPhone demand and margin-squeezing shifts among the various iPad models. Here was my takeaway from the latest round of warning shots, fired last week:

In next week's earnings report, Apple gets to dispel or confirm some of the current worries, and it might rise again if the news isn't too terrible. Regardless, it's still a house of cards resting on fickle consumer trends and an unsustainable margin structure. Apple may become a good value and dividend stock some day, but it will never be the trillion-dollar monster everyone thought they saw coming in 2012.

Apple delivered on nearly every worry, including high demand for older, less profitable products. CEO Tim Cook bent over backwards to put a positive spin on it all, of course: "Even if a particular data point were factual it would be impossible to accurately interpret the data point as to what it meant for our overall business because the supply chain is very complex and we obviously have multiple sources for things, yields might vary, supply performance can vary," he said. In other words, don't try to figure out how we're doing on your own, because I will tell you what to think.

Investors aren't listening, judging by the way share price drops accelerated as Cook spoke these supposedly reassuring words. Neither should you. Apple's high-margin, high-growth business model is breaking down, exposing a less profitable long-term future.

Apple without Steve Jobs is like Microsoft without Bill Gates. In the Ballmer era, Mr. Softy has traded sideways for 10 years, leaving investors little to celebrate other than a solid dividend policy. Redmond's lost decade is a preview of what's coming for Apple, and this report proves it.

You're still insane. What about Netflix?
The Netflix report showed that the company still knows how to add millions of new subscribers in a holiday quarter, when conditions are ripe for rapid growth. Wall Street analysts are learning just how quickly those extra customers add to the bottom line, thanks to a very lean cost structure around streaming services.

CEO Reed Hastings also outlined his big bet on creating original content, starting with Kevin Spacey vehicle House of Cards next week and the return of Arrested Development in April. If successful, these and other Netflix-owned shows might transform the company into an HBO for the digital era -- one of many premium content outlets that compete for consumer dollars by making and collecting high-quality content portfolios.

And if that wasn't enough, Hastings dropped hints that we might see another international market opening up in the back half of 2013. This depends on two things:

  • Netflix needs to be profitable on a global level. This already happened in the fourth quarter and should happen again in the coming period, but summer and fall seasonality could put a lid on profits in the second half of the year.

  • Management needs to be "pleased with the path of our existing investments," in the words of CFO David Wells. The return on international investments has been good so far, but the slate of original programming needs to prove its mettle in the coming months.

Again, none of this should surprise a careful Netflix observer. Even when share prices plunged last summer over seemingly crushing seasonality effects, it was obvious that this quarter would be strong. But Mr. Market seems genuinely surprised every time this happens:

Pricing data from Yahoo! Finance. See if you can spot the trend.

Look, I don't need to stand here and pound the table for you. Netflix will earn its way to business success as a leader in the digital entertainment era, and market makers will have no choice but to follow with higher share prices.

The takeaway from this dramatic duel is clear: Apple is mature and need to be treated as a no-growth value stock, but Netflix is still a vibrant upstart at the start of a steep climb to global prosperity. The writing has been on the wall for years -- in both cases. I know which one I'd rather own, and I'm backing it up with two CAPScalls and one real-world investment.

The precipitous drop in Netflix shares since the summer of 2011 caused many shareholders to lose hope. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.

Read/Post Comments (5) | Recommend This Article (3)

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 January 25, 2013, at 9:11 PM, jamiemcd wrote:

    I am ultimately bullish on Netflix, but I sold all my position today at $160 to put it into Apple. So I guess my money is on the idea that Netflix will float back down after the short squeeze is over and Apple will rise after all the negativity washes out. If I'm right, I'll then sell some Apple and put it back into Netflix. If I'm wrong, well, I only got a double with Netflix instead of the multibagger I expect it will turn into one day.

  • Report this Comment On January 26, 2013, at 1:19 AM, blueofblue wrote:

    too much s t u p i d s investors selloff AAPL

  • Report this Comment On January 26, 2013, at 1:21 AM, sliderw wrote:

    jamiemcd, nice strategy to play the fickle short-termers.

  • Report this Comment On January 26, 2013, at 11:27 AM, never2dull4u wrote:

    The fact that you are still long on NFLX could mean that you own NFLX at a higher cost.

    Regardless, good stocks don't stay low for long. I too was a NFLX bull. I love NFLX both the stock and the company, although I don't currently have a position.

    All companies go through a turbulence. Apple is where NFLX once was when it hit $50.

    As of today, I see absolutely nothing wrong with APPL fundamental. Only thing that changed is the sentiments. Furthermore, analysts sky high expectations is what led to aapl down fall. Other than that, nothing had changed besides where the stock price is at.

    It's not about "I told you so". It's all about the herd mentality, aka jumping on the bandwagon.

  • Report this Comment On January 26, 2013, at 11:39 AM, never2dull4u wrote:

    Btw, you can thank Hurricane Sandy and the very wet and cold regions in Q4 to help drive up NFLX memberships. Streaming is very "seasonal". You know that, right? I signed up in early Dec of last year. I will be cancelling next month once we get an early start spring season here on the west coast.

    We all know that Q4 and Q1 is where NFLX beef up their memberships.

    There's nothing magical in NFLX performance and it's stock movement.

    So please, refrained from "I told you so."

    Signing off.


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