It's all over the news. Technology stocks are underwater -- the Nasdaq Composite index has plunged 29% year to date, and there's no end to the chaos in sight. Between high inflation, rising interest rates, and added turmoil from the war in Ukraine, many investors are now concerned that a recession is on the horizon.
The sentiment is so low that even the FAANG stocks -- an acronym used to describe five best-in-class U.S. tech companies -- have been struck hard. Two of them in particular, Alphabet (GOOGL 10.22%) (GOOG 9.96%) and Netflix (NFLX -0.63%), have caught my eye lately. With both companies' stock prices down significantly since the start of 2022, let's determine which one looks like the smarter investment today.
Image source: Getty Images.
Alphabet continues to prosper
Compared to most technology companies today, Alphabet's business is performing exceptionally well. In its opening quarter of 2022, the company generated $68 billion in total sales, translating into 23% growth year over year, and its diluted earnings per share decreased 6.4% to $24.62. The outstanding top-line growth was driven by a solid outing from its core Google advertising business, which soared 22.3% to $54.7 billion, and its emerging Google Cloud segment, which surged 43.8% to $5.8 billion.
The company's operating margin also remained stable at 29.5%, compared to 29.7% in the year-ago period. According to Wall Street analysts, Alphabet's total revenue is expected to expand 15.3% in fiscal 2022 to $297 billion, and its diluted earnings per share are projected to contract 1.3% to finish at $110.77. Next year, analysts' forecasts call for top-and-bottom-line growth of 15% and 18.6%, respectively.
Not only are these burly growth rates for a company of Alphabet's size, but the business also boasts a cash and cash equivalents position of $20.9 billion and generated $15.3 billion of free cash flow (FCF) in Q1 alone. As a bonus, the stock has a price-to-earnings multiple of just 20.1 presently, which is notably lower than its five-year mean of 32.4. For long-term investors, this looks like a promising buying opportunity right now.
Netflix faces a string of obstacles ahead
Contrary to Alphabet, Netflix's business has been stuck in the mud. In the first quarter of 2022, the video-streaming titan increased revenue 9.8% year over year to $7.9 billion, and its diluted earnings per share dipped 5.9% to $3.53. More importantly, however, the streaming platform lost 200,000 paid subscribers during the quarter, and to add fuel to the fire, it expects to lose another 2 million subscribers again in Q2.
So what's the deal with the slowdown? Management pointed to a broad array of headwinds, including stiff competition from well-funded businesses like Walt Disney (DIS -0.04%) and Amazon (AMZN 3.43%), password-sharing, and COVID-19 pulling growth forward, which temporarily clouded the company's growth picture. For the full year, analysts expect the company's total sales to climb just 9% year over year to $32.4 billion and see its earnings per share retreating 3.6% to $10.84. Analysts expect a somewhat better year in 2023, with forecasts calling for the company's top and bottom line to both grow by 8.8%.
Not all is bad for the streaming giant, though -- Netflix still reigns over 45.2% of the global video-streaming market, enjoys a cash and cash equivalents position of $6 billion, and generated $802 million in FCF in the first quarter. And the stock trades at only 16.0 times earnings, offering investors a solid margin of safety at this time. The going has gotten tough for Netflix, but I still believe the streaming platform is well equipped to sustain success in the years to follow.
What stock should investors buy right now?
Personally, I think Netflix will rebound nicely over time. The company will continue to face a variety of headwinds for the foreseeable future, but its elite market positioning should allow it to overcome the obstacles in the long run.
That said, Alphabet looks like the safer and better play at the moment. The premier search engine operator is firing on all cylinders, and the company has more than enough cash on its balance sheet to comfortably ride out a recession all while continuing to invest in growing its business.
Although I like both stocks moving forward, Alphabet would be my first choice today.
