Apple vs. Netflix

Could there be a nastier match-up than this one? How can I be expected to choose between two stocks I love: Apple (Nasdaq: AAPL) and Netflix (Nasdaq: NFLX)? Call a technical foul on my editors for forcing my hand.

OK, that feels better. Let's get to the details. While neither ranks as the best stock idea I've ever seen, I've argued in favor of both firms on separate occasions. Apple, I said, was the best stock for 2008. Netflix, I said, was too cheap to ignore.

My track record with Netflix beats my track record with Apple thus far, but, if I'm forced to pick, I'll take Apple. And not just because Netflix's northward march has made the stock more expensive.

Cinderella is, after all, a fairy tale
I like the iEmpire most because it has more weapons:

Metrics

Apple

Netflix

Gross margin

35.0%

34.8%

Return on capital

23.2%

12.5%

Return on equity

29.1%

15.8%

Source: Capital IQ, a division of Standard & Poor's.

Notice how Apple, a hard goods supplier, outdoes Netflix and its lightweight business model in every category. That's crazy -- a testament to the competitive advantages Apple holds in its various fights for market share with Dell (Nasdaq: DELL), Hewlett-Packard (NYSE: HPQ), and Nokia (NYSE: NOK), among others.

Netflix, by contrast, is a one-weapon team playing in a weak division once dominated by Blockbuster (NYSE: BBI) and a slew of bankrupt or near-bankrupt rivals.

Don't get me wrong; I love this about Netflix. Come conference tourney time, you're almost guaranteed to win. But in the Big Dance, it's a different story. Cinderella usually turns to tatters at midnight.

No charity at the stripe
That's what happens when there's a mismatch. Here, the principal advantage of Netflix -- that it was cheaper -- has all but been eliminated by the recent run-up in price. Have a look:

Metrics

Apple

Netflix

Projected 2008 P/E

27.32

30.39

Projected 2008 PEG

1.31

1.68

Projected 2009 P/E

20.75

24.35

Projected 2009 PEG

0.99

1.35

Source: Capital IQ, a division of Standard & Poor's.

PEG ratio is by no means a perfect indicator but what it says is that, in terms of relative value, it's Apple that has the most upside potential.

But even if Wall Street's estimates are too aggressive -- they certainly could be -- I think it's fair to say that Apple doesn't command a premium price at these levels. Here's why. The Mac's daddy has improved its bottom line by more than 192% a year since 2003, and it's expected to grow by another 21% a year over the next five. Paying 27 times earnings for that sort of growth is, at worst, reasonable.

And Netflix? I'd pay 30 times earnings for this stock, but I'd be submitting to a premium -- one that Apple, a faster grower with a bigger moat, doesn't charge.

It's the difference between shooting the three-pointer and taking a lay-up. Either gives you a chance to put up points, but the odds of scoring improve when you're close to the basket. Steve Jobs is posted up at the bottom of the key as I write this.

Will you give him the rock? That's what my editors want to know. Go to Motley Fool CAPS and rate Apple to "outperform" if my argument swayed you. If not -- if you think Steve can't dunk in a black turtleneck -- choose "underperform." Our CAPS team will tally the votes after the polls close on March 30.

Ready for Stock Madness? Who's going to take home the trophy? See the rest of this year's bracket.

Apple, Dell, and Netflix are Stock Advisor selections. Dell is also an Inside Value pick. Try either of these market-beating services free for 30 days.

Fool contributor and Rule Breakers writer Tim Beyers, ranked 17,688 out of more than 93,000 participants in CAPS, didn't own shares in any of the companies mentioned in this article at the time of publication. The Motley Fool's disclosure policy is too tall to be shorted.