For investors with a long-term focus, owning high-quality companies is essential. Formed in 1985, Starbucks (SBUX +0.54%) is the premier retailer of specialty coffee in the world. Netflix (NFLX 1.74%) is the world's leading streaming service, with 183 million subscribers in over 190 countries.
While Starbucks stock is considerably lower year to date, Netflix has seen its stock skyrocket nearly 60% this year. Obviously these companies operate in completely different industries and have been affected by the coronavirus pandemic in varying ways, but I think investors would benefit from assessing both consumer names and deciding which direction to go. Let's take a look.
Starbucks
Revenues for Starbucks in the quarter ended March 29, 2020, fell 4.9% compared to the prior-year period. This is not surprising, given the temporary store closures, modified store operations, and slower traffic as a direct result of COVID-19. During this second quarter, Starbucks was forced to close 50% of its company-operated stores in the United States, as well as more than 75% in Canada, Japan, and the United Kingdom. While most locations are currently back up and running, a surge in new coronavirus cases has many worried that stores could close back up.
Image source: Starbucks.
The company's popular rewards program, however, has been a lone bright spot, adding 19.4 million subscribers in the U.S. alone, up 15% year over year. Starbucks has been a pioneer in developing a robust rewards program as a way to increase customer loyalty. The app's ability to allow coffee enthusiasts different options to pay and order ahead of time, paired with Starbucks' already successful drive-thru and pickup options, will help carry the business through this challenging time.
Although the second half of 2020 could be an improvement from the most recent quarter, Starbucks' growth prospects are much more limited when compared to Netflix. The company already has more than 32,000 locations worldwide, and while new stores are being added every quarter, that number will eventually stall. Starbucks will then have to drive growth by increasing ticket size, offering more food options, and hopefully getting people to drink larger amounts of coffee -- all dependent on raising the productivity and efficiency of its stores. That's definitely not impossible, but it's a clear diversion from simply opening more stores.
Netflix
Netflix has benefited immensely from the cord-cutting trend, which has accelerated due to the coronavirus health crisis. In Q1 2020 (the quarter ended March 31), the streaming giant added 15.77 million new paid memberships. For context, Netflix added 15.53 million subscribers in the previous two quarters combined. As shelter-in-place orders started taking effect in late March, people found themselves with limited entertainment options. There was truly no better environment for Netflix's business to thrive.
Image source: Getty Images.
From 2014 through 2019, revenues and profits soared at a compound annual growth rate of 29.6% and 47.5%, respectively. Netflix's huge subscriber growth has allowed it to spend more and more dollars on content creation and acquisition. I'm a huge fan of business models that are characterized by a flywheel effect, where different aspects feed into the growth of the overall company. It's quite easy to understand in Netflix's case -- the more subscribers the company adds, the more money it can spend on content, attracting better production and acting talent, which again drives subscriber growth, and so on. This entire process gives Netflix the opportunity to continuously improve its algorithms and technology, which boosts the perceived value of the service to consumers.
Even though the streaming wars have heated up, Netflix is holding firm to its first-place position. The company offers a compelling entertainment service that has only strengthened this year. A massive untapped global market is also extremely attractive for investors.
Skip the coffee
While both Starbucks and Netflix have their own merits, I'm going with Netflix for the long haul. The company upended an entire industry by focusing on offering consumers the convenience and flexibility they didn't even know they needed, all at a low price point. The business exhibits pricing power, scales extremely well as more subscribers support content spend, and has an enormous opportunity internationally.
Investors will balk at the price-to-earnings (P/E) ratio of 106, but I think having a long-term time horizon justifies purchasing a really outstanding business that has proven extremely resilient during tough times. I love my cup of coffee, but this time I'm pressing play.
