It's been a challenging summer for some of the market's tech leaders, but it's not as if one can say that shareholders of Netflix (NFLX +3.23%) and Google parent Alphabet (GOOG 0.15%) (GOOGL 0.57%) are smarting. Both stocks are trading less than 10% below their all-time highs, and there's no reason why coming through strong quarterly results next month won't lift both stocks back to their recent peaks.
What if you only had enough money to buy one of the two dot-com darlings? Netflix and Alphabet don't have a lot in common. One relies on advertising for 86% of its revenue. The other prides itself on being an ad-free streaming platform. One has proven to be recession-resistant, as Netflix offers a compelling stay-at-home value proposition when economies stumble. Alphabet's Google needs a thriving marketplace for lead-hungry advertisers to come knocking on its door. Sometimes it seems as if the only thing that Netflix and Google have in common is that they rub elbows at the end of the FANG stocks acronym. Let's size up the two very different tech giants to see which one is a better fit for your portfolio.
"Orange Is the New Black," a Netflix flagship. Image source: Netflix.
Growth or valuation?
Let's start at the top line, where a surprising trait investors will find at both companies is accelerating revenue growth. Large growth stocks tend to decelerate over time as their markets mature, but we're not seeing that at Netflix or Alphabet. They are both working on their third consecutive year of accelerating top-line gains after bottoming out in 2015.
| Netflix Revenue Growth | Alphabet Revenue Growth | |
| 2015 | 23.2% | 13.6% |
| 2016 | 30.3% | 20.4% |
| 2017 | 32.4% | 22.8% |
| 2018 YTD | 40.3% | 25.7% |
Data source: S&P Capital IQ.
Just the fact that revenue growth is gaining momentum at both companies makes them both winners on that front, though it bears pointing out that analysts see the streaks ending for both bellwethers in 2019. Don't worry: They will still be growing a lot faster than they did two years earlier.
However, in terms of sheer top-line growth spurts, it's clear that Netflix takes the crown. It has taken the world by storm with its streaming service, backed by more than 130 million subscribers as of the end of June. Alphabet naturally throws out an even wider global net, but when it comes to growth, this is Netflix's battle to lose.
The flip side here is valuation. Alphabet comes out ahead when butting heads with Netflix across every popular valuation metric. Alphabet trades at a reasonable 5.9 times trailing revenue, less than half of Netflix, with its multiple of 12.2. Head down to the bottom line, and it doesn't get prettier for Netflix, which trades for more than three times Alphabet's trailing P/E. Looking out to 2019, we find Alphabet at a palatable 25 times earnings, with Netflix several flights higher at an 87 multiple. Netflix is growing faster. It rightfully deserves a valuation premium to both Alphabet and the market. But Alphabet is still the winner of this round.
It's a photo finish
If there's a personal bias here, it would be that I own Netflix, and have owned the disruptive video service since 2002. It's my biggest winner -- by far -- and the only regret is that I sold most of my stake along the way.
However, if I can distance myself from the financially rewarding nostalgia, there is a lot to like about Alphabet here. It dominates search, just as Netflix is running away with the premium streaming-video market. Netflix and Google have vanquished strong challengers. Netflix is still on top despite the presence of Hulu with its TV-rich catalog, and Amazon Prime Video being made available to what is now more than 100 million Prime members at no additional cost. Google has survived the rise of social networking sites that were once a threat to siphon off search queries.
I'm going against my portfolio. I'm giving Alphabet the edge here. The valuation is right, and the prospects are bright. I believe that both stocks will beat the market in the next couple of years, but I'm giving Alphabet the better shot at delivering better returns in that time.
