Image source: Netflix.
Cord-cutting gets all the headlines and no company sees more of the responsibility for the trend than Netflix (NFLX +1.53%). The streaming video company is a force to be reckoned with in the television industry as it grows its audience and engagement every year.
The losers in the cord-cutting trend are often categorized as the cable companies like Comcast (CMCSA 1.68%). But Comcast has managed to start growing its video subscriber base again and the proliferation of Netflix and other streaming services has only bolstered its broadband internet service. The cable giant also owns NBCUniversal, which is more of rival to Netflix than its parent company.
Both companies are leaders in their respective markets, which have a significant amount of overlap. If you could only buy one of them, which should it be?
Growth versus cash flow
Netflix stock and Comcast stock are two very different beasts. Netflix is still heavily investing in growing its subscriber base while Comcast is working to extract the most cash out of its existing subscribers.
Netflix is burning cash to grow, particularly outside of the United States. It just expanded from around 60 countries to over 190 countries at the beginning of the year. As such, it requires a lot of new investments in content to fill the catalogs of the 130 countries it just added. Netflix has been moving toward more global licensing agreements with media companies, but, for the most part, content is limited in most of the new countries.
Netflix's biggest investments going forward will be in more original content. In the company's second-quarter shareholder letter management noted, "Our capital requirements continue to be driven by our investment in original content, particularly programming that we produce, which requires more cash upfront relative to licensed content."
The investment in originals is certainly worth it, albeit expensive. Management pointed out numerous benefits in the letter, including "new programming that debuts on Netflix, exclusivity, greater creative and business control, global rights and brand halo." But the result of such heavy upfront investment means negative cash flow.
Netflix is hoping its investments will help propel subscriber growth. Last quarter was extremely disappointing, however, when Netflix added just 1.7 million new members worldwide -- 160,000 in the U.S. and 1.52 million internationally. Analysts and Netflix itself were expecting more. If Netflix is going to justify its growing content expenditures, it will need to see better subscriber growth.
Comcast, meanwhile, is starting to add video customers after a decade of battling telecom companies for subscribers. The major competition has largely switched directions, and Comcast is benefiting. The company added 90,000 net new video subscribers over the last 12 months. It also continues to grow its broadband subscription base, which is nearing 24 million after the second quarter.
Comcast's cash flow continues to expand significantly. Through the first six months of the year, operating cash flow increased 4.9% year over year. Free cash flow has lagged as the company makes investments in new technology and content, but the company still brought in $1.4 billion in free cash flow last quarter.
Comcast is working to make its video service stickier with the introduction of X1, its new set-top box. It says nearly 40% of customers have X1, and it plans to get it into 50% of its customers' households by the end of the year. Comcast hopes X1 will prevent customers from cutting the cord while enabling it to continue increasing its average revenue per customer.
But where's the moat?
The problem with Comcast is that its moat is relatively narrow. It has a huge customer base of broadband subscribers to sell its more valuable video service, but it no longer has the moat it once did. For a long time, Comcast benefited from minimal competition and high costs of entry. The entry of telecom companies into Comcast's territory showed that competition is quite capable of taking subscribers.
With the introduction of more digital streaming television services like Sling TV or the upcoming service from Hulu, Comcast will start to face more competition than it's ever seen.
While Comcast still may be able to own the broadband connection required for those new services, it's facing potential competition on that front as well. Again, telecoms are the main competitors, with plans to use the next-generation network, 5G, to provide broadband internet to the home. Telecoms have the budgets to build out the necessary infrastructure to compete with Comcast.
In comparison, Netflix has a relatively wide moat. As it mentioned in its letter to shareholders, its original content provides it with exclusive content that premiers on Netflix and is available everywhere in the world. Its subscriber base of over 83 million provides it with a lot incoming cash to spend on more exclusive content, producing a virtuous cycle. It does have strong competitors with other sources for revenue, though.
Last quarter's results show that switching costs are still extremely low, however, as Netflix saw an increase in churn after increasing its pricing on a large portion of customers. While Netflix doesn't have unlimited pricing power, it's been able to successfully use price increases over the last two years to help grow its revenue outside of simply adding new subscribers.
So, which is the better buy? It really depends on what kind of investment you're looking for. If you want a growth stock that could potentially outpace the market for several more years, Netflix is your choice here. If you want a steady grower that spits out tons of cash every quarter, Comcast is a good buy.
