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Better Buy: Netflix vs. Google

By Anders Bylund - Oct 16, 2019 at 12:17PM

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There are no losers in this FANG-stock matchup, but one buy is far more urgent than the other. Here's why.

Netflix (NFLX 6.16%) and Google parent Alphabet (GOOG 2.68%) (GOOGL 2.63%) are two of the so-called FANG stocks. They are large-cap leaders in the high-growth portion of the tech sector, and many investors find themselves weighing whether Alphabet or Netflix is a better investment.

If that's you right now, let's see which of the two FANG giants you should buy here on the eve of their third-quarter earnings reports.

A businessman, seen from the back, is scratching his head over the wall in front of him where two large arrows point in opposite directions.

Image source: Getty Images.

What's going on with Netflix?

Netflix is dealing with a rapidly changing market for streaming video services. A number of new rivals are entering that scene, led by Disney+ from Walt Disney (DIS 3.98%) in mid-November. Investors are struggling with that trend, slamming the brakes on Netflix's rampant share price gains in 2019. The stock has nearly tripled in three years and more than quadrupled in 5 years, but it also took a 15% haircut over the last 52 weeks.

Of course, Netflix threw a spanner in its own works in July where the second-quarter subscriber additions didn't measure up to management's guidance. That miss sparked a 12% single-day drop that extended into a slower slide in the weeks and months that followed.

Wednesday evening's third-quarter report could either accelerate the downtrend or reverse it, based almost entirely on the number of subscriber additions. Most earnings reports draw your roving eye to headline metrics such as earnings and revenues. Not Netflix. It's all about the subs, especially at a time like this, when critics argue that the company is about to lose a ton of subscribers to competing services like Disney+.

Fellow Fool Dan Kline notes that the occasional miss against subscriber guidance is inevitable and should be expected. Management's guidance aims for accuracy rather than setting the company up for artificial surprises against lowball targets. Dan encourages Netflix investors not to panic over short-term bumps on a long road of global growth.

I agree wholeheartedly. In my view, Disney+ and friends won't decimate Netflix. Instead, the two will coexist and compete in a growing market that Netflix largely created in the first place. If you think Netflix is a giant today with a $123 billion market cap and 152 million subscribers worldwide, you just ain't seen nothin' yet.

The third-quarter report could be another whiff or a home run, but the real test comes in three months. Netflix has a history of absolutely crushing expectations in the holiday-themed fourth quarter, especially when those expectations were low. This time, January's report will give Netflix a chance to show how unfounded the current doomsday fears actually are.

For the record, Netflix expects to have added 7 million subscribers in the third quarter to land near a global total of 158 million. Whether you're a buyer today or not, those are the numbers you need to keep an eye on tonight.

What about Alphabet?

Alphabet's earnings report will follow after the closing bell on Monday, October 28. That's still nearly two weeks away.

Unlike Netflix, Alphabet has been a fairly calm security in recent years. The Class C stock -- a type I prefer in principle over Class A due to its voting powers -- has gained 23% in two years and 13% in 52 weeks. Both of these gains are within a few percentage points of stock market benchmarks such as the S&P 500.

That changes if you zoom out to a longer period. Alphabet Class C more than doubled the S&P 500 from a five-year perspective -- 130% vs. 61% -- thanks to a sharp spike in the summer of 2015 and a broader surge in 2017. That's how this megacap works. Alphabet sticks close to the overall market for a few quarters, lulling investors into a sense of calm normalcy.

The upcoming third-quarter report could turn out to be one of those sudden trigger events, but Alphabet is more likely to simply continue trading along with the market both before and after this event. I'm looking for a few potential catalysts to make an appearance, such as surging sales in the Google Cloud cloud-computing segment or a large marketing push behind one of Alphabet's growing number of offline operations.

If none of those triggers show up in the third quarter, I'm sure they will at some point in the next year or two. You have all sorts of time to invest in Alphabet because even the sudden market-beating jumps aren't game-changers that would move Alphabet's valuation up into Wall Street's nosebleed seats. Take your time, invest in this stock whenever you're ready, and enjoy many years of calmly market-beating gains that won't keep you up at night.

The final verdict: Buy Netflix first, but you should own both

There's a greater sense of urgency around Netflix's competition-based discount prices right now, so if you could pick only one of them today, Netflix would be it. That being said, you really can't go wrong with either one, and you should probably own both for the long haul. Both Alphabet and Netflix are important core holdings in my personal investment portfolio, for example. I humbly suggest that you should follow my lead.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Alphabet (A shares), Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Netflix, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$244.11 (6.16%) $14.17
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$119.70 (2.63%) $3.07
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$120.65 (2.68%) $3.15
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$112.43 (3.98%) $4.30

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

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