Better Buy: Comcast vs. Netflix

The pandemic has affected Comcast (CMCSA 1.08%) and Netflix (NFLX 0.58%) in very different ways. Comcast suffered as social distancing measures kept consumers at home, accelerating the shift away from traditional TV. Netflix, on the other hand, benefited from relatively strong subscriber growth in 2020.

Even so, Comcast stock is up 47% in the past year, but Netflix is up just 19%. But that's in the past. Let's look at which one is the better buy today.

Comcast: the cable giant

Comcast's business can be broken into four broad segments: cable communications, NBC Universal, Sky, and other.

Image source: Getty Images

Through its cable communications business, Comcast provides high-speed internet, cable, home phone, and wireless services. Notably, cable and phone customers peaked in 2016 and have been in decline ever since, reaching a new low in 2020. However, cable communications revenue has still trended upward due to the steady addition of new broadband and mobile subscribers.

NBC Universal's top line has also been in decline since 2018, driven by falling sales across cable and broadcast networks as well as film entertainment. This trend accelerated in 2020 as the coronavirus forced cinemas and theme parks to close, resulting in a 17% drop in revenue in this segment.

Sky is a European media company that Comcast acquired in 2018. Like its U.S. cable TV counterpart, Sky is likely a dying business, though both may take a decade or more to fizzle out completely. Not surprisingly, revenue in this segment dropped 3% in 2020 as consumers continued to shift away from traditional pay TV.

Finally, Comcast's other revenue includes Peacock, the streaming service it launched in July 2020. This is a big growth opportunity, but Comcast faces tough competition from the likes of Netflix and Disney. Case in point: During Comcast's most recent earnings report, management said Peacock reached 42 million subscribers, while Disney+ has over 100 million. Moreover, the popularity of Comcast's content pales in comparison to Disney's portfolio of films and original series.

On the whole, Comcast's troubles have led to a lackluster financial performance in recent years.

Source: Comcast SEC  Filings. CAGR: compound annual growth rate.

Comcast's greatest advantage is its leadership position as a high-speed internet provider. Comcast has more broadband subscribers than any other cable or telco company. But that advantage may be in jeopardy. With the rise of 5G wireless networks, providers like Verizon are offering wireless home internet. Investors should pay attention to this situation in the coming years.

Netflix: the streaming giant

Netflix launched its streaming service in 2007, sparking a dramatic shift in the way people watch TV. Consumers around the globe are cutting the cord, favoring the flexibility and better prices typically offered by streaming media.

Despite mounting competition, Netflix's first-mover status has kept it ahead of the pack. According to eMarketer, Netflix captured 36.2% of all subscription video revenue in the United States last year, while second place Disney took 24.9%.

Moreover, Netflix ended the first quarter of fiscal 2021 with 207.6 million subscribers. While that number fell short of management's guidance, it's still more than twice as many subscribers as Disney+, the next closest competitor.

In general, Netflix's revenue depends on two variables: subscribers and subscription prices. To that end, the company has invested heavily in original content. In fact, Netflix produced nine of the top 10 original streaming series in 2020, according to Nielsen. That's important because this strategy helps differentiate its service, and popular content allows Netflix to attract new users and justify price increases.

Since 2017, Netflix has grown its customer base by 88%, and the average subscription price is up 22%. That compounding effect has powered strong growth on both the top and bottom lines.

Source: Netflix SEC Filings. TTM: trailing-12-months. CAGR: compound annual growth rate.

Between 2016 and 2020, the number of pay-TV households in the U.S. fell from 97.7 million to 77.6 million -- a 5.6% decline per year. By 2024, most U.S. households will have either canceled or never had traditional pay-TV, according to eMarketer. That trend should power continued growth for Netflix in the years ahead.

The bottom line

Netflix is the clear winner of this contest. Despite efficient vertical integration, Comcast's legacy cable and broadcasting businesses are becoming less relevant, and the company faces stiff competition in the broadband and streaming spaces.

Netflix, on the other hand, appears to be on the right side of history. Its top line is growing more quickly, and its leadership position in the streaming industry gives it an advantage over its rivals. That's why I think this growth stock offers more upside for investors.