Shares of Netflix (NFLX 1.73%) and Amazon (AMZN 0.58%) skyrocketed to all-time highs in 2021 amid the buying frenzy in higher-growth tech stocks. But both stocks collapsed over the past year as rising interest rates drove investors toward more conservative investments.

Netflix's stock now trades nearly 60% below its all-time high of $691.69 from November 2021. Amazon's stock has also declined more than 50% since it closed at its historic high of $186.57 in July 2021. Should investors buy either of these fallen FAANG stocks as the bear market drags on? If both are viable, which is the better buy right now?

A person watches a streaming video on a smartphone in a dark room.

Image source: Getty Images.

Netflix is losing its early mover's advantage

Netflix's launch of its first streaming platform in 2007 gave it an early mover's advantage in that nascent market. But today, it faces intense competition from formidable rivals like Walt Disney, Amazon, Warner Bros. Discovery, Paramount Global, and even Apple in the saturated streaming space.

That saturation has taken its toll on Netflix's growth. Netflix's number of paid subscribers only rose 4.5% year over year to 223.09 million in the third quarter of 2022, compared with its 5.5% growth in the second quarter and 9.4% growth in the prior-year quarter. It expects that subscriber figure to only rise 2.6% year over year to 227.59 million in the fourth quarter.

By comparison, Disney ended its latest quarter with over 235 million subscribers across all of its streaming services (Disney+, ESPN+, and Hulu), representing 31% growth from a year earlier.

To address its slowing growth in paid subscribers, Netflix recently rolled out a cheaper ad-supported tier and started to block shared passwords. But at the same time, Netflix's costs are rising as it ramps up its production of original shows to widen its moat against its well-funded competitors. That's why analysts expect Netflix's revenue to only rise 6% this year as its earnings decline 8%. For 2023, they expect its revenue and earnings to grow 7% and 1%, respectively.

Netflix's business isn't headed off a cliff, but its high-growth days could be ending as streaming services displace linear TV platforms as the main source of TV shows and movies. In other words, it will struggle to stand out in the market it created. 

Amazon's core businesses face fierce macro headwinds

Amazon also established head starts in the e-commerce and cloud infrastructure markets by launching its first online marketplace in 1995 and its cloud platform Amazon Web Services (AWS) in 2002. Those two businesses dominated their respective markets and became Amazon's core growth engines.

Over the past decade, Amazon subsidized the growth of its lower-margin retail business with AWS's higher-margin revenue. Therefore, as long as AWS keeps expanding, Amazon can afford to expand its sticky Prime ecosystem -- which now serves more than 200 million paid subscribers worldwide -- with steep discounts, free shipping options, brick-and-mortar stores, and other loss-leading strategies.

During the pandemic, Amazon's e-commerce business grew as more people stayed home, while its cloud business expanded as the usage of cloud-based services skyrocketed. But those tailwinds dissipated as the pandemic passed, and inflationary headwinds curbed consumer spending and exacerbated that year-over-year slowdown. The macro headwinds also caused large enterprise customers to rein in their cloud spending, while the rising dollar significantly reduced its overseas revenue.

As a result, analysts expect Amazon's revenue to decline 9% this year with a full-year net loss as both of its growth engines sputter out. But next year, they expect its revenue to rise 10% as it returns to profitability. 

The valuations and verdict

Netflix trades at 27 times forward earnings, but that multiple is pretty high relative to other traditional media companies. By comparison, Disney and Paramount trade at 21 and 12 times forward earnings, respectively. If you believe Netflix is still an innovative technology company, it might be reasonably valued. But if you believe it's merely a traditional media company that has lost its first mover's advantage in the streaming market, it seems a bit overvalued relative to its industry peers.

Amazon trades at 41 times forward earnings. That multiple is a bit high for both the e-commerce and cloud markets, but it's also being inflated by its near-term earnings decline. If Amazon's profitability stabilizes and improves again over the next few years, its forward valuations could cool off again.

I wouldn't rush to buy either of these stocks in this rough market. But if had to pick one over the other, I'd stick with Amazon because it's better diversified, it faces fewer competitive headwinds, and it will profit from the long-term secular growth of the cloud infrastructure market. Netflix is still the world's largest premium streaming video provider, but I'm not convinced it can maintain its lead as its core market gets carved up by hungry competitors.