Pairing up a disruptor against the disrupted may not seem like a fair fight, but don't go assuming that Netflix (NFLX +2.60%) is an easy choice over Comcast (CMCSA 0.52%) (NASDAQ: CMCSK) in a battle for the best purchase for your portfolio.
The narrative is certainly there. Millennials are "cutting the cord" as they free themselves from costly cable and satellite television subscriptions, turning to more affordable streaming video platforms. Comcast is the country's largest pay TV provider. Netflix is the top dog in premium online video.
Netflix is a market darling. It was the S&P 500's biggest gainer in 2013 and 2015. However, Comcast has missed the memo where it was supposed to disappear. The stock has moved higher in five of the past six years on a dividend-adjusted basis, more than quadrupling in the process. Only one of the two stocks is trading higher so far in 2016, and it's not Netflix.
It's Comcastic
Comcast has made the most of its situation, offsetting the gradual decline in pay TV customers through higher rates, but also through growth in its industry-leading broadband service platform. Its acquisition of NBCUniversal also made it a juggernaut in media networks, movie production, and even theme parks.
Diversity has paid off. The stock moved higher after posting encouraging quarterly results yesterday. Revenue climbed 5%, and it would've moved even higher if it wasn't for a lack of Universal theatrical releases. In a welcome surprise, the number of pay TV customers actually increased both sequentially and year-over-year, something that has been the exception and not the rule lately.
Factor in healthy growth at its theme parks since 2009's debut of The Wizarding World of Harry Potter and continuing subscriber growth for its Internet service and you have a company that is far from dead. It also isn't afraid to innovate.
More than a third of its customers are now on the X1 platform, Comcast's interactive interface that lets users search across content for custom-tailored recommendations. The voice-activated platform is giving folks a reason to keep the cord exactly where it is. Linear television may be dying, but Comcast is rolling with the changes.
Nothing but Netflix
Unlike Comcast, Netflix shares moved sharply lower after posting disappointing quarterly results last week. The market was disappointed with its forecast for 2.5 million net additions during the current quarter, guidance that would make this its weakest performance in terms of net acquisitions in two years.
Netflix is still in a good place with more than 81.5 million total subscribers worldwide. It's clearly growing faster than Comcast. Analysts see 29% growth this year, well ahead of the 6% top-line advance that Wall Street's eyeing for Comcast. It's not as profitable, largely the result of Netflix's brisk overseas expansion and its relentless commitment to shelling out top dollar for compelling content.
Comcast is clearly ahead of Netflix by most valuation metrics. Even if we look out to next year, Netflix is fetching a whopping 89 times projected earnings. Comcast trades at a more reasonable multiple of 16 times next year's profit target. Comcast also offers a yield of 1.8%. It will be several years before Netflix is likely to entertain a payout policy.
However, investing isn't simply a matter of finding the deepest value. Netflix is certainly worth its premium to both the market in general and Comcast in particular. Netflix and Comcast may be the top dogs in their respective pay TV fields, but only one niche has a bright prognosis for growth. There are economies of scale in Comcast's world, but Netflix has the more sustainable moat with its existing base north of 81 million that it can use to divvy up the $12.3 billion it has in streaming content obligations. With international customers now making up 42% of its subscriber base, most of Netflix's growth will come from its overseas push -- something that is not a factor for Comcast's flagship business.
Netflix is the better positioned stock for growth investors, but Comcast holds definite appeal for more conservative investors. Both stocks are misunderstood. Both companies are survivors.
