Both digital video veteran Netflix (NASDAQ:NFLX) and social media giant Facebook (NASDAQ:FB) are crushing the market in 2020. The COVID-19 pandemic has posed serious challenges for all businesses, including these two, but stay-at-home policies during the health crisis have been generally good news for Netflix and Facebook.
As of early September, Facebook shares have gained 47% year to date, while Netflix's stock rose by 71%. The stocks are hovering just below their 52-week and all-time highs. Investors generally expect the good times to keep on rolling, judging by the very low interest in selling Netflix or Facebook short even at these high prices. Which one of these market-stomping stocks is the better buy right now? Let's take a closer look.
The case for Facebook
The social network operator smashed Wall Street's expectations in its second-quarter report. Earnings nearly doubled year over year to $1.80 per share. Top-line sales rose 11% to $18.7 billion. Your average analyst would have settled for earnings near $1.39 per share on revenues in the neighborhood of $17.4 billion.
Facebook's social networks like Instagram and WhatsApp are important tools for people under lockdown to stay in touch. The company is taking advantage of this unique opportunity by sprinkling advertising content into its news feeds and chat conversations, and the stellar results speak for themselves.
The company is under fire for its role in the American voting system. A powerful social network is a double-edged sword, particularly in election years; its platforms can be used both to raise awareness of important issues and to spread harmful disinformation. The novel coronavirus pandemic has had a similar effect, giving Facebook the ability to save lives to endanger them.
CEO Mark Zuckerberg argues that Facebook is taking every possible precaution to make sure that the information people share is trustworthy and accurate.
"I'm proud that we have given a platform for people to make their voices heard and given small businesses access to tools that only the largest players used to have," Zuckerberg said in the second-quarter earnings call. "Since COVID emerged, people have used our services to stay in touch with friends and family who they can't be with in person, and to keep their businesses running online even when physical stores are closed."
Zuckerberg and his team will surely breathe a huge sigh of relief when the final votes of 2020 are tallied, and another when the COVID-19 crisis finally peters out. Until then, the company will remain tremendously profitable while dodging and parrying many different controversies.
The case for Netflix
The video streaming expert is facing a different mix of challenges and opportunities. Netflix slammed the brakes on its content production efforts in April due to COVID-19 social distancing restrictions. The company is slowly restarting its soundstages now, but the production schedule took a big hit. At the same time, consumers under lockdown flocked to Netflix's streaming video platform around the world, and the second-quarter report was a thing of beauty.
Netflix added 10.1 million paying subscribers in the second quarter. Revenues rose 25% year over year, and the company reported positive free cash flows -- a direct result of the halted content production efforts. Share prices still dipped on the news because the third quarter should see fewer subscriber additions, but this report made a strong case for Netflix as a viable and profitable business in the long run.
The winner: Netflix
If my support for Facebook sounds weak, it's because I honestly can't muster up a whole lot of enthusiasm for the company's business model. It's working now, and the company stands ready for a generational switch to the Instagram and WhatsApp platforms. I don't see a clear path to long-term success beyond that, apart from guessing where the social media market will move next. A decade or two from now, Facebook could very well be remembered as the next MySpace or Friendster. I could be wrong, but I sure wouldn't bet the farm on Facebook, especially not at the sky-high valuation ratios the stock carries right now.
Netflix, on the other hand, is poised to skyrocket much higher from this lofty platform. Digital media is already a big thing as we speak, but it will take many years before that market is fully formed. And Netflix is only a couple of years away from reaping the true rewards of its original content production, creating a global cash machine of epic proportions. Everybody is talking about this exciting growth stock for good reason.
There is no doubt in my mind that Netflix is a better buy than Facebook right now. The video-streaming specialist is showing the whole world how to run a high-growth business with an unshakable focus on delighting the customer.