Netflix (NFLX +0.55%) and Facebook (FB +2.06%) are both market leaders in massive industries with long growth runways ahead. Not surprisingly, the stocks have each trounced the market lately as their businesses have demonstrated eye-popping momentum.
But which of these market darlings makes the better bet for investors today?
Netflix vs. Facebook
|
Metric |
Netflix |
|
|---|---|---|
|
Market capitalization |
$72 billion |
$455 billion |
|
Sales growth |
30% |
54% |
|
Net income |
$187 million |
$10.2 billion |
|
Price-to-earnings ratio |
217 |
39 |
Data sources: Company financial filings. Sales growth and net income are for the last complete fiscal year.
Buy Facebook for its operating dominance
By the most important operating metrics, Facebook is the far stronger business today. Sure, sales growth is trending lower right now as the service hits a natural limit on the volume of advertisements it can put in users' feeds. Yet revenue still improved by 49% last quarter, compared to 35% for the streaming video giant.
It's no contest on profitability, either, as Facebook's operating margin hovers around 40% of sales while Netflix's has been stuck at closer to 4%. Finally, the social media titan generated almost $12 billion of free cash flow last year, whereas Netflix is burning through cash at a roughly $2 billion annual pace.
Image source: Facebook.
Facebook executives believe that video will both improve user engagement and increase value for its advertisers over the next few years. That should help it continue posting healthy ad growth, but likely not at the incredible 54% pace it managed last year. Still, when considering its raw earning power, cash flow, and sales, investors should have a clear preference for Facebook today.
Buy Netflix for its opportunity
Netflix arguably has a larger growth opportunity ahead. After all, Facebook already counts over 1 billion active users around the world and has a massive business outside of the core U.S. segment. It gets over 50% of its sales from international markets today.
Netflix, on the other hand, has only recently established a presence in many international markets. Growth in those areas helped it log accelerating subscriber gains last year and the proportion of international subscribers is approaching, but hasn't yet passed, 50%.
Data source: Netflix filings. Chart by author.
The streamer hasn't generated real profits from its international division, choosing instead to invest all excess earnings into growth initiatives like bulking up its local content, building up the brand, and improving the service so that it entrenches itself as the leading streaming video provider. In that way, the company looks a bit like Facebook did in 2012 when it booked roughly zero profits and no free cash flow thanks to aggressive spending on acquiring developers and prepping for the transition to mobile-dominated usage.
Nothing approaching Facebook's subsequent business success appears to be in the cards for Netflix, but its growth prospects are still unusually bright. Executives believe that internet TV is just in its early innings even in the mature U.S. market. Netflix can climb to as many as 90 million users here over time, they say, compared to 49 million now.
As for earnings, CEO Reed Hastings and his team are managing the business so that operating margin almost doubles to 7% this year. That improvement is happening with almost zero help from the international segment, which is about to pass 50 million subscribers, up from 36 million a year ago.
Over the next few years, these markets will likely begin climbing toward the U.S. segment's almost 40% margin to make Netflix a far more profitable business. If you like the prospect of sharp earnings growth and believe Facebook is already about as big as it can get in the social media space, then Netflix is the better stock for you.
