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Amazon vs. Netflix: Which Is a Better Growth Stock to Buy?

By Daniel Sparks – Aug 22, 2021 at 9:05AM

Key Points

  • Both companies' growth accelerated in 2020.
  • Amazon's $1.6 trillion market capitalization is easier to justify than you might think.
  • Analysts expect faster growth in earnings per share from Netflix.

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Both companies are top-notch. But which stock is trading at a more attractive valuation relative to its long-term prospects?

Two wildly successful companies are often discussed in the same breath, whether it's surrounding their tenured presence in the popular group of FAANG stocks or the fact that they both offer fast-growing streaming-TV services. Those stocks are none other than Amazon (AMZN -0.77%) and Netflix (NFLX -2.04%), two longtime Wall Street darlings.

Today, both of these companies remain extremely successful, continuing to grow their top and bottom lines rapidly. Indeed, a good case can still be made for buying both companies' stocks.

But which of these two growth stocks is a better buy today: e-commerce, cloud computing, and digital services juggernaut Amazon or pure-play streaming TV specialist Netflix?

A person looking at a company's annual report on a laptop.

Image source: Getty Images.

Amazon

Amazon has stubbornly resisted the meaningful deceleration in growth you would expect from a company as big as it is. Indeed, revenue growth accelerated last year. In 2019 and 2020, revenue grew 20% and 38%, respectively. Sure, 2020 results benefited significantly from increased e-commerce use as people around the world were sheltering at home amid a pandemic. But even as Amazon laps tough comparisons from 2020, it is growing rapidly. Second-quarter 2021 net sales increased 27% year over year. 

The company's profits have been growing even more rapidly. Net income in the trailing 12 months ended June 30, 2020, was $29.4 billion, up from $13.2 billion in the same period one year earlier.

And Amazon stock isn't as expensive as one might think. Yes, its $1.6 trillion market capitalization is hard to fathom. But with $443 billion in trailing-12-month sales, $59.3 billion in operating cash flow, a fast-growing top line, and a steadily expanding operating margin, this valuation starts to look conservative, or even cheap.

Netflix

Streaming TV company Netflix is similarly growing its top line rapidly. Revenue increased 19% year over year during the second quarter.

But the real magic for Netflix right now is the company's soaring earnings. EPS in the second quarter was $2.97, up from $1.59 in the year-ago period. More importantly, analysts expect rapid earnings growth to persist over the next five years because of how scalable the company's business model is. Content costs and other expenses are quickly declining as a percentage of revenue.

On average, analysts expect Netflix's earnings per share to compound at an average annual rate of 43% over the next five years -- ahead of the 36% growth expected from Amazon. Understanding Netflix's uncanny earnings potential is key to justifying its high price-to-earnings ratio of 56.

The verdict

Overall, both stocks look like attractive long-term investments. But the better buy might be Amazon, thanks to its robust top- and bottom-line growth and its sprawling competitive advantages from its powerful flywheel of Prime member benefits and its leadership in both e-commerce and cloud computing.

Amazon's growth story ultimately seems more sustainable and predictable as the company benefits from numerous secular tailwinds across various aspects of its business.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Netflix Stock Quote
Netflix
NFLX
$285.54 (-2.04%) $-5.96
Amazon Stock Quote
Amazon
AMZN
$93.41 (-0.77%) $0.72

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