Few companies in the first two decades of the 21st century have had cultural impacts as great as those made by Facebook (FB 2.29%) and Netflix (NFLX 0.45%).
The social media platform changed the way people interact. The streaming video pioneer gave us a whole new entertainment concept -- binge-watching -- and changed how we consume media. Along the way, these companies have made their long-term shareholders extremely happy.
But, as we prepare to start the century's third decade, which stock looks like the better buy?
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A look at Netflix
Rapidly increasing competition in video streaming has made investors skittish about Netflix of late. But after a December surge in sentiment, the stock is up 26% year to date. That slightly trails the S&P 500's gain of 28%. At $336 per share, Netflix is still about 20% below its all-time closing high of $418.97 on July 9, 2018.
The main issue for investors has been the company's deceleration in subscriber growth just as deep-pocketed, blue-chip rivals are launching and upgrading their own services. The battle for viewers' money and time will be intense. Disney's Disney+ streaming service launched for $6.99 per month, a bit more than half of what Netflix charges for its standard plan. Apple's Apple TV+ is $4.99 a month. Both launched in November and others, such as AT&T's HBO Max and Comcast's Peacock, are coming in 2020.
The fear regarding Netflix is that some subscribers could cancel in favor of cheaper services; but as the cable cord-cutting trend continues to gain momentum, viewers may not be making as many either/or choices on this front. The more common move may be to add new streaming services but keep Netflix.
Concerns about how the competition will impact it are valid, but to underestimate the company, with its nearly 159 million subscribers, would be a mistake. That big subscriber lead was built thanks to the power of an enormous content library and massive ongoing spending on new originals. When Netflix produces a film like Martin Scorsese's The Irishman -- a November release getting Oscar best-picture buzz -- people want to see it. More than 26 million accounts streamed the gangster film in its first week of availability.
Quality original content not only lures subscribers, it also helps support price increases. According to newly released company data, Netflix raised prices in all its international regions -- the United States and Canada (UCAN), Europe, Middle East and Africa (EMEA), Latin America (LATAM), and Asia-Pacific (APAC).
In the third quarter, the number of UCAN subscribers grew by 6.5%, but price increases meant total revenue grew nearly four times as fast, at 25%. Internationally, subscriptions are growing much faster, and Netflix has been able to gradually increase its prices in those markets, too. In the three regions outside of UCAN, third-quarter paid subscribers increased 35% year over year, while revenue grew 41%.
A look at Facebook
With difficulties ranging from data breaches to platform abuses, Facebook has in recent years been mired in controversy. The Federal Trade Commission (FTC) fined it $5 billion this year for consumer privacy violations, by far the largest penalty levied against a company in the agency's history. Now, the FTC reportedly is considering seeking an injunction that would prevent the company from integrating its Messenger, WhatsApp, and Instagram apps -- a key part of its long-term strategy.
Through it all, however, billions of people keep checking their Facebook feeds, and the company keeps growing. In its most recent quarter, Facebook reported increases in revenue (29%), operating earnings (24%) and net income (19%).
The number of daily active users hit 1.62 billion in September, up 9% year over year. And across its four major platforms -- Facebook, WhatsApp, Instagram, and Messenger -- the total was 2.2 billion daily active users and 2.8 billion monthly active users. Those visitors led to a 37% increase in ad impressions, and there's still room for growth.
Research firm eMarketer estimates that digital advertising spending will increase by 56% between 2019 and 2023 -- from $333 billion to $518 billion. Facebook and Alphabet's Google combined to receive roughly half of that 2019 spending (Google 30% and Facebook 20%), according to eMarketer.
As more and more companies move their advertising dollars to digital, Facebook should benefit.
The final call
There might not be a bad choice between Netflix and Facebook. Both have growing user bases and appear to have pricing power -- Netflix for subscriptions and Facebook for advertising. Both also face headwinds -- Netflix from increased competition and Facebook from government regulators and reputational damage. Right now, though, I think two factors separate these companies when it comes to their potential as investments.
The first is valuation. On a price-to-earnings ratio basis, Facebook is the better value, at 33 compared to Netflix's 108. Facebook's forward P/E ratio also looks better, at 23 compared to Netflix's 61.
The second factor is cash flow. Facebook has produced $19.1 billion in free cash flow in the past 12 months, giving it the flexibility to invest in its business to fuel future growth. Netflix is profitable, but is expected to burn about $3.5 billion in cash this year. Content costs are expected to reach $15 billion, up from $12 billion last year. The company continues to add debt, and that's a risk if there is an economic downturn.
Given all that, right now, my choice for the better stock to buy is Facebook.
