The past five weeks have been particularly brutal for investors, and many of the biggest technology stocks weren't spared from the unprecedented market volatility resulting from the COVID-19 coronavirus outbreak. There's even a growing sense that a recession is inevitable, given the number of schools and businesses that have shut down. Consumers -- who drive the majority of economic activity -- are increasingly forced to shelter in place, with no end in sight.
Yet, e-commerce giant Amazon.com (AMZN +0.55%) and social media titan Facebook (FB 1.18%) have become lifelines to consumers in their own separate ways: Amazon is a critical pipeline for necessary household items, while Facebook helps keep people connected with families and friends near and far.
Both companies are more attractively priced than when the market descent began, but in the face of growing economic uncertainty, which is a better buy?
Image source: Getty Images.
Amazon
The coronavirus outbreak has made Amazon the lifeline of choice for many consumers unwilling to venture outside their homes. The emerging stay-at-home orders have played to many of the company's strengths. Needless to say, e-commerce is booming as customers unwilling to risk a trip to the grocery store have turned to ordering online. Families in isolation have turned to streaming Prime Video and Prime Music as much-needed diversions. Amazon Web Services (AWS) -- its cloud computing operation -- has helped many businesses to continue their operations remotely.
That's not to say there haven't been challenges. Demand has surged, forcing Amazon to forego delivery of non-essential items to its warehouses, in order to focus on high-demand consumer staples and much-needed medical supplies. This left many merchants unable to sell their wares, causing Amazon to suspend merchant loan repayments until at least April 30.
The pandemic has forced the company to make other on-the-fly changes to its business, like temporarily suspending its Prime Pantry grocery delivery service and announcing plans to hire more than 100,000 workers to staff its fulfillment centers and delivery vans. Amazon, along with other streaming video services, has reduced the picture quality and streaming speeds in Europe and elsewhere in order to reduce congestion. There have also been numerous outbreaks of coronavirus at Amazon's warehouses, forcing the company to combat the illness on yet another front.
Image source: Amazon.com.
There's little doubt that as more and more people are sequestered at home, many are turning to social media to stay connected -- and nobody has a bigger network than Facebook. With more than 1.66 billion daily active users (DAUs) and 2.5 billion that log in every month, no other social media platform can come close to Facebook's network effect. Simply put, because of the large number of users, those who are new to social media and want to connect with friends are more likely to choose Facebook -- because that's where their friends are.
That's not all. Facebook has other services that form its family of platforms -- Instagram, Messenger, and WhatsApp -- that, combined, attract 2.26 billion users each day and 2.89 billion each month.
Like many of its tech brethren, Facebook has had to make a number of adjustments to its business to navigate the complexities of the pandemic. The company was forced to throttle the streaming quality on its platforms across much of Europe and Latin America, reducing traffic by 25% to ease local congestion on the internet.
Unfortunately, Facebook earns the lion's share of its revenue from advertising, and marketing budgets are typically among the first to be slashed during economic downturns. Needham analysts Laura Martin and Dan Medina are seeing lower spending in a number of ad categories, including travel, retail, consumer packaged goods, and entertainment -- which account for between 30% and 45% of Facebook's total revenue. Additionally, six of the 10 largest advertising markets worldwide are "currently COVID-19 hotspots."
Image source: Facebook.
Stock performance and valuation
Both stocks have held up better than the broader market since the market decline began, with Amazon down 12% and Facebook down 24% (as of this writing), compared to the 28% loss of the S&P 500. That trend persists even over the longer term, with Amazon gaining 7% over the past year, even as Facebook and the S&P have fallen 7% and 9%, respectively, giving Amazon the edge on performance.
Both companies are more attractively priced than in mid-February, as reflected in their valuation metrics.
|
Company |
P/E ratio |
P/S ratio |
P/FCF ratio |
|---|---|---|---|
|
Amazon |
83 |
3 |
45 |
|
|
24 |
6 |
21 |
Data from SEC filings and YCharts. P/E = price-to-earnings. P/S = price-to-sales. P/FCF = Price-to-free-cash-flow. Chart by author.
From a strictly-valuation perspective, Facebook is a better value based on its price-to-earnings ratio and price-to-free-cash-flow ratio, while Amazon is less expensive based on the price-to-sales ratio.
Amazon boasts better stock performance, while Facebook has the edge in valuation.
Advantage: Tie.
Financial fortitude
Both companies have a sufficiently strong financial position to weather the storm and are in a virtual tie from the financial fortitude standpoint. Amazon has more net cash, Facebook generated greater income, and the companies are in a statistical tie for free cash flow.
|
Company |
Cash |
Debt |
Net Income (TTM) |
Free Cash Flow (TTM) |
|---|---|---|---|---|
|
Amazon |
$55 billion |
$23 billion |
$11.59 billion |
$21.65 billion |
|
|
$19 billion |
$0 |
$18.48 billion |
$21.21 billion |
Data from SEC filings and YCharts. TTM = Trailing-12-month. Chart by author.
Advantage: Tie.
Recent results and growth prospects
During the fourth quarter, Amazon sales grew 21% year over year, accelerating from 20% growth in the prior-year quarter, boosted by the company's one-day delivery initiative that began early last year. Amazon announced that its Prime subscribers had blossomed to 150 million paid memberships around the world. At the same time, the company delivered operating income and profit growth, with earnings per share up 7%, even in the face of increased one-day shipping expenses.
Facebook was also saddled with investment in its business, as the company worked to secure its platform and decrease interference by those who would use the platform for their own ends. Fourth quarter revenue grew by 25% year over year, driven by a 9% increase in DAUs and 8% jump in MAUs. At the same time, EPS climbed by 8%.
With both companies displaying similar recent results and a statistical tie until now, it's growth prospects that will decide this contest. The ongoing pandemic is simply too big to be ignored. As described above, Facebook's principal business -- advertising -- is among the first areas to take a hit in the face of economic uncertainty. Amazon has a much more diversified revenue stream, and its biggest segments are better insulated from the pandemic. Several of its businesses are even seeing a boost from the wave of consumers forced to stay at home.
Advantage: Amazon.
Winner: Amazon
It's worth noting that the solid long-term prospects of both companies and industry-leading positions give them each a good chance of beating the market over time. That said, with the ongoing economic uncertainty caused by coronavirus and the potential for a recession, Amazon is better positioned at this point to ride out the storm.
