Netflix (NFLX -3.92%) is a streaming media giant that hardly needs an introduction. AT&T (T 1.88%) acquired Time Warner, now called WarnerMedia, with its own plans to tackle the streaming media business.
Do AT&T's deep pockets give it an advantage over Netflix? Or does the younger company possess a new-media nimbleness that allows it to outmaneuver its larger rival? Let's examine both companies to find out which is the better investment.
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Netflix's streaming success
The COVID-19 pandemic led to shelter-at-home restrictions that translated into growing consumer adoption of streaming services such as Netflix. Yet its success existed long before the pandemic, with steady revenue increases every quarter for years.
Data by YCharts.
Its rise in revenue goes hand in hand with continued growth in Netflix's paid streaming memberships. The company has enjoyed double-digit, year-over-year membership increases for years.
| Quarter | Global Streaming Paid Memberships | YOY Growth |
|---|---|---|
| Q1 2020 | 182.9 million | 22.8% |
| Q1 2019 | 148.9 million | 25.2% |
| Q1 2018 | 118.9 million | 26% |
Data source: Netflix. YOY = year over year.
Netflix's success comes with solid financials. Along with first-quarter revenue of $5.8 billion compared with $4.5 billion the year prior, the company's net income rose to $709.1 million, more than doubling 2019's $344.1 million.
Its first-quarter balance sheet was solid with $35 billion in total assets compared with $26.7 billion in total liabilities. Netflix's free cash flow totaled $162 million versus a deficit of $460 million in 2019 due to savings from a halt to film production as a result of the pandemic.
While the entertainment industry suffered from the pandemic-induced shutdown to film production, Netflix's production model gives it an edge. The company films an entire season far in advance because it releases all episodes at once.
According to its chief content officer, Ted Sarandos, the company's 2020 film slate is nearly completed, and Netflix is "pretty deep" into its 2021 slate. This means while rivals struggle to deliver new content, Netflix is in a strong position to retain subscribers.
AT&T's mixed success
AT&T spent billions building a media kingdom, amassing significant debt in the process. Along with Time Warner, AT&T acquired DIRECTV in 2015. Its media divisions did not fare well in the wake of the COVID-19 pandemic.
The company introduced a streaming solution for its linear television subscribers called AT&T TV in March, just as the pandemic reached its peak. Sports events, such as the NCAA men's basketball tournament, were canceled, creating significant declines in ad revenue. This, combined with theater closures, led to AT&T's WarnerMedia division experiencing a first-quarter revenue drop of $1 billion year over year, from $8.4 billion to $7.4 billion.
Moreover, the company's DIRECTV business, under its entertainment segment, has steadily lost subscribers in the wake of streaming media's popularity. The segment lost 897,000 premium TV subscribers in the first quarter, leaving it with 18.6 million, down from 22.4 million subscribers the year prior.
The telecom icon unveiled its latest streaming service, HBO Max, on May 27. This service competes directly with Netflix, leveraging the HBO brand and a rich content catalog, such as Watchmen and Friends. Here, AT&T possesses the advantage of bundling its telecom offerings with its streaming services. Another edge is that HBO Max streaming won't count toward data caps.
Although WarnerMedia contributed 18% of total operating revenue in 2019, the bulk of AT&T's revenue comes from its telecommunications business. In Q1, the company's communications segment generated $34.2 billion of its $42.8 billion in total revenue. Its wireless service revenue grew 2.5% year over year, contributing to the company's free cash flow of $3.9 billion. Its total assets of $545.4 billion outstrip its total liabilities of $350 billion.
The final verdict
AT&T consistently generates billions in free cash flow every quarter, and it offers an attractive dividend currently yielding 7%. Its wireless business is stable, and it looks forward to further revenue growth as customers gradually upgrade to AT&T's faster 5G network.
Despite these positives that make AT&T a worthwhile investment, its media business is losing linear TV subscribers and relies heavily on advertising revenue. The U.S. linear television business is set to lose billions this year due to canceled sports events. AT&T must also pay large debt obligations, diverting cash it could otherwise invest in its business.
Netflix does not suffer any of these issues. It continues to grow revenue and subscribers, even amid a pandemic and global economic slowdown. The company is also working toward obtaining consistent positive free cash flow annually.
Netflix's proven success in its business model justifies its inclusion as one of the FAANG stocks, and makes it the better investment.
