Better Buy: Apple vs. Netflix

Apple's (AAPL -0.35%) electronics have captivated consumers for decades, and Netflix (NFLX -0.63%) has reshaped home entertainment. Not surprisingly, both of these tech stocks have been great long-term investments. Shares of Apple and Netflix have skyrocketed 419% and 412%, respectively, over the last five years.

However, Netflix has stumbled in the past 12 months, underperforming the S&P 500 by a wide margin. But Apple stock has continued to soar. Will those trends continue? Let's take a closer look.

Apple

Fast Company recently recognized Apple as one of the most innovative consumer electronics brands in the world -- and it's hard to argue with that. From the first iPod to the latest M1-powered Macs and iPads, Apple has been on the cutting edge for decades.

Image source: Apple.

After a lackluster performance driven by weak iPhone sales in 2019 and 2020, the tide appears to be turning for the Cupertino company. Apple launched the 5G-enabled iPhone 12 last November, and it's already been a huge success. iPhone sales hit $114 billion through the first six months of fiscal 2021 (ended March 27, 2021), up 34% over last year.

Even so, Wedbush analyst Dan Ives sees more upside. He believes the company is on pace to sell a record-breaking 240 million to 250 million iPhones this year. Notably, Apple's smartphone market share jumped from 14% to 16% in 2020, while Samsung's fell from 22% to 20%. A year of record iPhone sales could help the company maintain that momentum.

But iPhone sales aren't the only growth driver. Apple has also made progress in its services business. Over the last two years, the company has launched subscription products like Apple News+, Apple TV+, and Apple Fitness+, expanding its ability to monetize its global user base. So far, things are going well. Services revenue hit $33 billion in the first six months of 2021, up 25%.

As a whole, Apple's business has grown at a double-digit pace in recent years -- an impressive feat for a $2.1 trillion company.

Data source: Apple  SEC filings. TTM: trailing 12-months. CAGR: compound annual growth rate.

Going forward, investors should pay attention to Apple's hardware sales as the semiconductor shortage plays out. During the most recent earnings call, CFO Luca Maestri mentioned that supply constraints could cause a $3 billion to $4 billion headwind to revenue in the third quarter.

Netflix

In 2008, Blockbuster CEO Jim Keyes said Netflix wasn't even on his radar in terms of competition. Instead, he pointed to electronics giants like Apple as the greater threat. You probably know the end of this story -- Blockbuster filed for bankruptcy two years later, and Netflix has transformed the way people watch TV.

Image source: Getty Images.

Since 2011, Netflix has focused on creating original content. This strategy hasn't been cheap -- the company plans to spend $17 billion on content this year -- but it makes sense. Original content allows Netflix to differentiate itself, which helps drive subscriber growth and justify price increases.

In general, the company's greatest advantage is its scale. With 208 million subscribers, it has access to troves of viewer data. And it can use that data to inform its content creation and licensing decisions.

The bull case is relatively straightforward: Netflix is the largest streaming content provider, which should make it a long-term winner as more consumers shift away from traditional TV. The company's pursuit of original content is paying off. Currently, Netflix owns eight of the top 10 original series, according to Nielsen.

However, the bear case is also straightforward: Netflix faces more competition each year. In fact, Disney's streaming service has already been wildly successful, reaching 100 million subscribers in just 16 months. Moreover, Disney was producing original content seven decades before Netflix even existed.

Even so, Netflix has delivered strong top-line growth in recent years, and its free cash flow recently flipped into positive territory.

Data source: Netflix SEC filings. TTM: trailing 12-months. CAGR: compound annual growth rate.

Netflix CEO Reed Hastings has repeatedly rejected the idea of an ad-based business model, so the company's future prospects depend entirely on its ability to add new subscribers and raise prices. Going foward, investors should focus on these metrics, particularly in international markets like Latin America and the Asia-Pacific region where Netflix is still growing rapidly.

The verdict

In terms of valuation, Apple is slightly cheaper at 6.7 times sales, while Netflix trades at 8.7 times sales. Apple is also far more profitable, and it has several interesting products in the pipeline, such as augmented reality glasses and the Apple Car.

This is a tight race and I like both companies, but I think Apple is the better buy here.