The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 4, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment... and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."
But, please, make no mistake -- "Stock Madness 2005" is a GAME!
Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn... and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.
Celgene
Summit, N.J.
$32.07
52-week low-high: $22.47-$35.24
$5.5 billion market cap
By Charly Travers (TMF BreakerCharly)
In the biotech sector, Celgene is as rock solid as they come. The number of biotech companies with more than $500 million in annual revenue that also have solid growth prospects over the next few years can be counted on one hand.
In Round 1, Celgene trounced Dell
The Sweet Sixteen matchup is against Netflix, and that is a company I like a lot. I use its service all the time, which is something I hope I can never say about Celgene. But that is the only nod I'll give to Netflix here. There is one glaring advantage in favor of Celgene, and that is the ultimate measure of a company: the bottom line.
In 2004, Celgene had $0.32 GAAP earnings per diluted share. The company expects diluted EPS to jump 57% to $0.55 this year. On a P/E basis alone the multiples are sky-high. But that's because the growth in earnings is so robust. Factoring in that growth, the PEG Ratio is fairly reasonable at 1.
Coincidentally, Netflix also had diluted EPS of $0.32 last year. But that is where the similarities end. In stark contrast to Celgene's rocketing earnings growth, Netflix has guided that despite an expected 50% jump in the top line, it is going to lose money this year. That's a pretty bad sign when a company is growing itself right into the ground.
Celgene is the clear winner here. It's just a better type of business. Strong products, minimal competition, and fat profit margins are leading to excellent growth in the bottom line. As the measure of a business, that is the number that counts.
Fool contributor Charly Travers is the biotech analyst for Motley Fool Rule Breakers . He does not own shares of any company mentioned in this article.
Netflix
Los Gatos, Calif.
$9.76
52-week low-high: $8.91-$38.62
$0.5 billion market cap
By Rick Aristotle Munarriz (TMF Edible)
Let's go for a blind taste test. Stock A is growing sales at a better than 30% clip, yet its stock has tripled over the past two years. Stock B is a market leader, growing its top line even faster, yet the market has found it fit to smash the stock to the point where it is trading at less than a third of where it was a year ago.
You can savor the flavor of both, but which brand would you rather buy? If you chose B, welcome to the soothing taste of Netflix.
Earlier this week Netflix announced that it had grown its subscriber base to 3 million members. While some may have considered that it was ambitious for Netflix to guide investors to expect DVD rental accounts to grow from 2.6 million to a cool 4 million this year, here we are 29% of the way there in less than a quarter of 2005.
So even with Blockbuster
As a subscriber it's easy to fall for Netflix. For just $17.99 a month you can borrow three DVDs at a time and keep them for as long as you like. Return a disc, and the next available film in your queue is on its way. With more than two dozen distribution centers around the country, overnight delivery is possible through standard postal service delivery.
Despite a library of more than 35,000 different titles, the company's massive base of subscribers often means that your next title is probably floating around locally. That's why Amazon is unlikely to enter into a price war with an inferior product and why Blockbuster can't truly compete against Netflix without cannibalizing its physical stores.
Celgene? Great biotech, but there is no way that it is worth more than 10 times Netflix (closer to 20 times when you back out the generous amount of cash on Netflix's balance sheet). Celgene is looking to produce revenue of $500 million this year. Netflix will be good for at least $700 million. I'm not suggesting that Netflix will see its shares grow tenfold to approach Celgene's asking price, but it's easy to see why folks whose buds have been burned by pop favor Stock B.
Fool contributor Rick Munarriz has been a Netflix investor -- and subscriber -- since 2002. He does not own shares in any of the other companies mentioned in this tournament match.
Rebuttals
I am a huge movie buff and a big Netflix fan. I like Netflix so much I have more than 400 movies in my queue at this moment. While this is coming across as a ringing endorsement and not a rebuttal, let me also say that I am a former Netflix shareholder. Here's the reason why. You see, 4 million subscribers and $700 million in revenue this year are the distractors. That's the magician waving the wand to take our eyes off of what matters. What matters is that despite that fact that Netflix offers a superb service and tremendous growth in the customer base, its profits are just an illusion. It is flat out going to lose money this year. Will Netflix ever make any real money? That's an important question. Profits count, and on that score Celgene has Netflix beat soundly. -- C.T.
Netflix can be a biotech. Compare a pipeline to the stocked Netflix queues. It's passed the consumer clinical trials with customer turnover at an all-time low. Its R&D is essentially the money it is pouring into marketing right now, which finds it commanding four times as many subscribers as its only real competitor. Yet Netflix is dirt-cheap. Its wonder drug of convenience won't go off-patent in a matter of years. Why pay more for generic? -- R.A.M.
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