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Best Buy: Tesla, Amazon, or Netflix?

By Jeremy Bowman - Updated Oct 31, 2017 at 1:14PM

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Ranking three of today's most disruptive companies.

Tesla, Inc. (TSLA 1.24%), Inc. (AMZN 3.15%), and Netflix, Inc. (NFLX 2.90%) have captivated the market unlike any other stocks over the past decade.

All three have delivered blockbuster returns while disrupting a wide range of industries, showing a genius for reinventing themselves as they evolve.

While these stocks are already certified success stories, plenty of investors are still wondering if there are more gains to be had. 

Let's take a look at what each one has to offer today to determine which is the best buy of the three. 

The Tesla Model 3

The Tesla Model 3. Image source: Tesla.

A car company like no other 

Tesla and CEO Elon Musk have dazzled the market since the company's 2010 IPO. The stock has jumped nearly 1,400% since then. The car maker bucked early skepticism that it couldn't make electric vehicles profitably, and is now focused on building out scale for its new Model 3, the first mass-market vehicle it's manufactured, which carries a starting price at $35,000.

Of the three stocks here, Tesla is the most controversial and the biggest battleground stock of the group. Twenty-seven percent of the company's shares are sold short, and a number of bears have questioned the valuation of the still-new car maker, which has a market cap in line with industry giants like General Motors and Ford. Those two companies produce millions of cars each year and generate billions in profits, while Tesla has no profits yet. It's burned over $1 billion in cash over the last year, and its annual car production is in the tens of thousands, with 83,922 manufactured in 2016.

Tesla hopes to produce 1.5 million cars annually as soon as 2020. The bull thesis is reliant on the company quickly ramping up production, which was why recent production headaches and news of 700 employees being fired caused some doubt about the company's ability to reach its goals.

Still, Tesla has important competitive advantages that investors shouldn't ignore. The Gigafactory it's building in the Nevada desert, in a joint venture with Panasonic, will have annual battery production capacity of about 35 gigawatt-hours, nearly equal to the world's total battery production today, and will significantly lower the cost of battery cells, expanding its market by lowering prices. Its supercharger network also gives it an advantage over other EVs that have to rely on public chargers, and it's ahead of the curve in autonomous vehicle technology. Its renewable energy technologies, like the Powerwall and Powerpack, separate it from traditional automakers even further.

Above all, a bet on Tesla is a bet on renewable energy. The company's aspirations are much greater than just making cars.

A woman working in an Amazon fulfillment center

Image source: Amazon.

World domination in sight

Dubbed "The Everything Store," Amazon's ambitions have outgrown its online storefront. The company is a leader in cloud computing, and has built out businesses ranging from video streaming to the Alexa voice-activated technology. Its Prime loyalty program gives it an unmatched competitive advantage by locking members into a unique set of benefits, including free two-day shipping, free video streaming, and soon discounts at Whole Foods.

Its market power in retail has gotten so great that mere rumors of its entry into a new line of business cause stocks in that sector to dive. Supermarket stocks plunged when news broke that it would acquire Whole Foods in June, and have not recovered since. 

The company also has other competitive advantages. More than 100 cities are falling over themselves in order to host its second headquarters, offering as much as $7 billion in tax incentives, and Amazon has become the #1 recruiter of business school grads, replacing traditional employers like banks and management consultants.

The company has rung up $150 billion in revenue in the past year, and its top line is growing faster than 20%. While its profit margin is still narrow, that is by design: sacrificing profits for market share and customer satisfaction has driven the company's impressive growth. 

Amazon's reputation for low prices and customer service has given it unrivaled market power, and its massive momentum means that antitrust concerns may now be its biggest threat.

A woman at reception in the Netflix office

Image source: Netflix.

Streaming everywhere

Netflix is coming off its second straight quarter with blowout subscriber growth. The streaming leader is growing faster than ever nearly two years after it completed its global expansion. The company now has 110 million subscribers around the world, giving it a huge lead over competitors like Amazon, Hulu, HBO, and broadcast networks like Disney, which are just beginning to get into streaming.

Netflix plans to spend $7-8 billion on content next year, much more than any of its peers, which should further cement its leadership and add to its subscriber totals. Like Amazon, Netflix also has considerable market power. The stock jumped when it announced that it would raise prices earlier this month, as doing so should allow the company to increase profits and pay for more content while still offering customers a bargain.

While some have questioned the company's debt borrowing and negative free cash flow, Netflix's growth has justified that approach. Revenue is set to grow 32% this year, and should accelerate next year thanks to the price hike.

Its reputation for quality original programming has also been burnished by the 20 Emmy awards it won this year, and its influence is changing how business gets done in Hollywood.

Management sees Internet TV gradually replacing linear TV over the next 20 years, with Netflix at the forefront of that transition. The company's execution seems like a good indicator that that prediction will come true. 

Who's the best buy?

Despite competing in different industries, these stocks have more similarities than differences. All three are disruptive forces with several competitive advantages and huge growth potential over the next generation.

However, these stocks also trade at sky-high valuations with little profits to speak off, a sign that investors have big expectations for them. Therefore, the best way to compare the three and decide which one to buy may be by their risk profiles.

With no profits and recent production problems, Tesla is the riskiest of the bunch. Investors need to have faith that the company will not run into manufacturing and execution slowdowns, and will be able to produce 1 million or more cars annually within the next few years. That the company is already worth about as much GM and Ford means that it also needs to turn its gigafactory and other renewable energy plays into big businesses. Those are by no means guaranteed, but the upside could be sizable as the renewable energy market could explode.

Netflix seems to be the next riskiest. Its debt borrowing strategy and negative cash flow could backfire if rivals close the gap with it or if its original programming loses its edge. Bears still believe that Netflix could end up being one of many players in a mature streaming industry, and unless it branches out beyond its current model, into something like sports or movie theaters, its revenue will simply be a function of its subscriber base, meaning it has a lower growth ceiling than Tesla or Amazon. Even if it doubled its subscriber base, it would still only have about $25 billion in revenue based on today's prices. Still, the company is profitable and the clear leader in a fast-growing industry. There's less of a risk of a pullback here than with Tesla.

Finally, Amazon has arguably more competitive advantages than any company on Earth, and may be more feared than any other as well. Though the company's valuation poses a risk, Amazon is well positioned in so many fast-growing areas and has such a strong reputation that it's hard to see the company's  revenue growth slowing down meaningfully, at least over the next few years. As it gets bigger, its market power will only grow, making it even more powerful and its economic moat bigger. At a market cap of $500 billion, it won't be so easy for the stock to double -- but that could happen in another few years, as many think it will be the world's first trillion-dollar company.

Of the three, Amazon seems to have the least downside. Tesla has the most upside potential, but is also the riskiest. All three stocks are risky compared to the broader market, so the best way to play this group is according to your own appetite for risk as shown above.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$179.95 (2.90%) $5.08, Inc. Stock Quote, Inc.
$109.56 (3.15%) $3.35
Tesla, Inc. Stock Quote
Tesla, Inc.
$681.79 (1.24%) $8.37
The Walt Disney Company Stock Quote
The Walt Disney Company
$96.14 (1.84%) $1.74

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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