The tech and entertainment industries were rattled last year as soaring inflation triggered a stock market sell-off. Amazon (AMZN 1.62%) and Netflix's (NFLX 0.92%) active roles in both markets led their stocks to plunge about 50% during 2022. Despite a partial recovery since Jan. 1, shares in these companies remain down over the last three years, prompting a potential buying opportunity.
Inflation eased for the ninth consecutive month in March, with prices rising 5% compared to 6% in February and 9.1% in June 2022. This has already provided a small boost to Amazon and Netflix shares -- and it could prompt a bull run if a reduction in the cost of living bolsters business over the next year. So now could be a smart time to consider investing in one of these tech giants.
But first, you'll need to know which is the better buy. So let's find out whether your money is better off with Amazon or Netflix.
Amazon
Amazon has an increasingly diverse business with solid positions in cloud computing, grocery, streaming, space satellites, and more. However, it's the company's e-commerce business that has made it a household name worldwide and provided it with the funds to expand into other markets. Unfortunately, Amazon's dominance in online retail proved a weak point amid macroeconomic headwinds last year, with its North American and international segments reporting $10.6 billion in operating losses in fiscal 2022.
However, improving inflation has Wall Street feeling bullish about Amazon's long-term e-commerce prospects. J.P. Morgan analyst Doug Anmuth said on April 21 that he expects the company to continue growing its market share through untapped retail areas like grocery, apparel, and furniture while also improving operating margins. Anmuth explained that Amazon "is taking meaningful steps to control costs" after the company laid off about 27,000 workers over the last year, closed or shut down production on dozens of warehouses, and shuttered ongoing projects like Amazon Care.
As a result, the J.P. Morgan analyst maintained an overweight rating for Amazon and a price target of $135, which projects stock growth of 27%. Anmuth is not the only one bullish about Amazon. Forty-six out of 50 analysts currently hold a strong buy/buy rating for the company, with Amazon projected to make a strong recovery this year.
Netflix
Netflix investors have been on a roller coaster in recent years, with the COVID-19 pandemic sending its stock skyrocketing to an all-time high in November 2021. Then, economic hurdles last year sent its stock crashing back down alongside steep losses in subscribers. The company has gradually begun recovering, reporting membership growth for three consecutive quarters since the third quarter of 2022. However, Netflix still has a long way to go to win back investors with consistent revenue gains.
On April 18, Netflix released Q1 2023 results. Revenue of $8.2 billion rose 3.7% year over year but missed analysts' expectations by $20 million. The company continued to suffer from a highly competitive streaming market and reduced consumer demand. But it remains optimistic with its ad-supported tiers and plans to expand password-sharing crackdowns.
Alongside cuts to content spending, Netflix expects these initiatives to boost operating margins by 18% to 20% and generate "at least +$3.5 billion of free cash flow" over the next year.
Netflix is the most successful streaming service through engagement and subscriber count. However, its stock volatility makes it a tough sell. While competitors like Amazon and Walt Disney have businesses covering a wide range of markets, Netflix is all in on streaming. Its lack of diversification has led to marginal revenue growth amid macroeconomic challenges, with its future profitability contingent on remaining the streaming king.
Is Amazon or Netflix the better buy?
Regarding revenue diversification alone, Amazon is the better buy. Its position in multiple high-profit markets makes it less risky than Netflix and has allowed it to retain a positive outlook despite recent hurdles in its online retail business.
For instance, although Amazon's e-commerce business reported substantial operating losses in 2022, its cloud platform, Amazon Web Services (AWS), kept the company profitable with its $22.8 billion in operating income. E-commerce is likely to come back strong over the next year, but you can invest in Amazon now, knowing profitability is not an issue in the meantime.
Netflix has done well to expand into advertising and boost revenue with password-sharing crackdowns, but both efforts are still too strongly tied to streaming subscribers to fortify its future earnings.
Moreover, Netflix's average 12-month price target of $361 accounts for 11% stock growth. Meanwhile, Amazon's average 12-month price target of $137 would yield a 32% return on your investment from its current position. As a result, Amazon is the better buy and a no-brainer investment right now.
