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Better Buy: Netflix, Inc. vs. Facebook

By Rick Munarriz - Mar 14, 2016 at 12:02AM

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The top dogs in social networking and premium streaming video have a lot to offer investors -- with fat valuations to boot.

Image source: Netflix.   

Here's a neat cocktail party trick: The next time you find yourself at a conversation's lull, bet that you know the website that the person spends the most time on. Ask for two chances to get it right. Offer up Netflix (NFLX 2.90%) and Facebook (META -0.76%).

You will probably be right. Netflix is the undisputed champ of primetime online usage, accounting for more than 37% of North American downstream traffic in the peak evening hours on fixed access networks, according to broadband network solutions provider Sandvine.  

Facebook is no slouch. Daily active users now top a billion worldwide, and naturally the fascination is amplified closer to home. A whopping 72% of adults in the U.S. use Facebook, according to market tracker Pew Research Center.   

Netflix and Facebook are clearly our most pervasive online addictions, but which one is the better investment? Let's pit the two dot-com darlings against one another to determine the better buy.

In terms of growth it isn't even close. Facebook's growth soared 44% in 2015, and it wasn't just fueled by user growth. Facebook's monthly active user base of 1.59 billion has only grown by 14% over the past year. It's the combination of folks spending more time on Facebook and advertisers willing to spend more to reach them that's driving the heady top-line growth. Facebook's three-year annualized revenue growth rate is 52%. 

Netflix clocks in with a 23% growth rate for both 2015 and the annualized clip of the last three years. Netflix has been able to push through a couple of modest subscription rate increases to new members, but its growth has relied largely on subscriber growth. It has seen its global base of streaming accounts expand by 30% to nearly 75 million through 2015, offset by the steady flow of defections from its original disc-based rental offering. 

The year ahead will find the lead narrowing for Facebook. Wall Street pros see Netflix's top-line growth accelerating to 29% in 2016 as it makes a big push overseas. Analysts see Facebook's revenue gains slowing to 43% this year. The advantage clearly belongs to Facebook.

It's a bit harder to pull off a fair valuation comparison. Netflix trades at a ridiculous 376 times this year's profit forecast, but that's weighed down by the massive costs of gaining a foothold in young international markets and shelling out big bucks for original or desirable content. Even if we look out to next year we see Netflix fetching a hefty 90 times income estimates. Profitability is expected to improve sharply once it starts turning a profit overseas. Look all the way out to 2020 and Netflix's multiple drops to 15 that year's analyst income target, but obviously a lot can and will change between now and then.

Facebook trades at a more reasonable 35 times this year's profit projection and 26 times next year's estimate. Go out to 2020 -- a fair exercise since we did so for Netflix -- and Facebook is trading at 14 times that year's earnings target. 

Facebook is growing faster and trading at a more compelling earnings-based valuation than Netflix. That would seem to give Facebook the nod, but let's not forget about the moat. It may seem as if Facebook with its mammoth user base is the one with the insurmountable lead, but cyberspace can be fickle. Friendster and MySpace didn't stay on top forever, and while it seems as if Facebook has cracked the code, one can never underestimate a new app, site, or platform doing a better job of connecting the masses. Netflix may seem to have well-entrenched competitors, but in terms of actual usage it continues to pad its lead with every passing year.

It would seem easier to take on Facebook as a social platform than it would to be to woo Netflix's more than 75 million paying subscribers, having to top its $10.9 billion in streaming content obligations to make sure it had more compelling content. So, yes, Netflix has its advantages, and at the end of the day with both companies dominating their lucrative markets it's hard to go wrong with either dot-com speedster. 

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
$179.95 (2.90%) $5.08
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$160.03 (-0.76%) $-1.22

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