Well ... some would say Netflix and streaming represent the future of video content consumption, while Comcast and cable TV providers represent the past. That makes Netflix the "obvious" choice for growth investors.
But Netflix stock has already more than doubled over the last three years and it could be nearing the end of its growth streak. Meanwhile, Comcast stock is up around 11% in the past year and generates a 2% dividend yield, making it the "obvious" choice for value and dividend investors.
But slapping a label on a stock (growth, value) and calling it a day can lead you to miss out on some great investments. Case in point: Netflix offers value for today's investors. Likewise, Comcast has some great growth levers to pull. That makes determining the better buy today much less obvious.
Netflix, the value stock?
Netflix has long been a growth story, and 2019 was no exception. It finished the year with 167 million subscribers worldwide -- a 20% increase in subscribers from the end of 2018. This subscriber growth coupled with price increases drove full-year revenue up 28%. Net income and earnings per share grew a more impressive 54% year over year.
For 2020, analysts expect the same. Netflix provided consensus estimates in its earnings call transcript. In 2020, the consensus forecast has revenue rising another 22% and earnings per share rising 34% to $5.53. That means the stock trades around 6.6 times forward sales and over 60 times forward earnings. Neither of those metrics looks cheap. But consider that at this time last year, the stock was roughly where it is today. Investors then were paying over eight times forward sales and around 100 times forward earnings. Relatively speaking, today's price doesn't look as bad.
Furthermore, consider that forward estimates only look one year ahead. As investors, we strive to envision the company three to five years out. When thinking long-term, Netflix has global reach with plenty of room for growth as improved internet connectivity worldwide turns every household into a potential customer. What's more, it's starting to actively pursue free cash flow (FCF) generation and expects to improve FCF by $800 million this coming year. With continued growth and improving financial performance, it's not hard to envision this stock appreciating more from here over the next few years. That would make today a good time to buy.
Comcast, the growth stock?
Perhaps forgotten as investors flock toward more trendy stocks, Comcast provides a compelling valuation for value investors, looking cheap by almost any metric. It currently trades at just 13 times forward earnings, less than two times sales, and an enterprise-value-to-EBITDA ratio under 10.
The problem for Comcast? Comcast is a cable provider, and cable is dying. All told, the company lost 733,000 cable subscribers in 2019 -- 3% of its video customers. Yet total revenue was up 15% for the year, as were earnings per share. This led to a record $13.4 billion in free cash flow and allowed the company to increase its dividend by 10%, the 10th straight year it's raised its dividend by at least 10%.
How does a "dying" cable business do it? The answer is that Comcast is more than simply a cable TV provider. The company provides internet services and cellphone connectivity, makes movies, and even operates Universal Studios theme parks. This creates a more diverse and stable business, even if the cable TV operations are struggling.
Comcast added over 1.4 million high-speed internet customers in 2019 -- far outpacing the customer loss in cable TV. And this internet success is also a driver of another growth engine for the company. It appears that consumers are starting to like the idea of bundling cellphone service and internet. Comcast offers bundling options and was able to add 816,000 new wireless lines in 2019. It finished with just over two million -- up a whopping 66% from 2018.
The better buy
When looking at the balance between growth and value, I can't say Netflix is the better buy today. It's certainly a valuable company worth owning, but personally it's hard for me to buy at 60 times forward earnings. That said, beware avoiding Netflix solely on valuation fears. Over the last decade, there's never been a shortage of pundits claiming the stock was overvalued. Meanwhile, the stock price has grown close to 4,000% over that time.
I'm not recommending avoiding Netflix; I'm saying Comcast is the better buy. Internet and wireless still provide growth drivers going forward, at a valuation that is cheap compared to the market. And considering its dividend payout ratio is currently around 30%, the company has plenty of free cash flow to comfortably continue its history of paying and raising its dividend for years to come.