Major tech companies began the internet decade as start-up stocks and grew to trillion-dollar valuations relatively quickly. Over the last few years, FAANG stocks have risen to prominence. FAANG is an acronym for Facebook, Inc. (FB), Amazon.com, Inc. (AMZN), Apple Inc. (AAPL), Netflix, Inc. (NFLX), and Alphabet Inc’s Google (GOOGL). These companies have climbed to unprecedented operational heights and dominance in their respective markets on the back of their sound business models and strong earnings.
GOOGL and NFLX, in particular, performed exceptionally well last year. They upgraded and expanded their offerings to meet changing consumer demand amid the COVID-19 pandemic and to facilitate a “new normal” way of life for people worldwide. NFLX witnessed an influx of new subscriptions as consumers streamed entertainment content, and GOOGL leapt to the forefront in shaping the future of enterprise software solutions with its cloud-based offerings.
Both stocks have generated decent returns over the past three years. While GOOGL returned 106.9% over this period, NFLX gained 119.1%. However, in terms of year-to-date performance, GOOGL is a clear winner with 18.9% returns versus NFLX’s 1.3%.
Let’s dig in further to see why GOOGL is better positioned than NFLX for 2021:
Business Structure and Latest Movements
GOOGL is well known for its search engine and brand advertising services worldwide. The company operates through Google Services, Google Cloud, and Other Bets segments and offers products that include Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. The Other Bets segment includes businesses such as Access, Calico, CapitalG, GV, Verily, Waymo, and X, as well as internet and television services.
Yesterday, Google Cloud inked a decade-long collaboration deal with Telus Corporation (TU) for digital transformation within vital industries, including communications technology, healthcare, agriculture, security, and connected home. The partnership will also fast-track Telus’ IT and network transformation initiatives, while assisting in 5G services and Multi-Access Edge Computing (MEC) delivery. GOOGL also signed a new, multi-year, strategic partnership with Twitter (TWTR) this month to move its offline analytics, data processing, and machine learning workloads to Google’s Data Cloud.
NFLX is widely known as a streaming giant due to its dominance in the sector. The company offers streaming services and delivers TV shows and movies directly to TVs, computers and mobile devices in the U.S. and internationally. The platform has more than 200 million paid members in more than 190 countries globally.
NFLX’s focus on creating original content has been one of the key drivers of its subscriber growth over the last decade. NFLX caters to a wide range of users and has invested heavily in developing content in local languages as part of its international expansion. Though the company faced a potential shortage of content during the first half of 2020 as much content production was suspended due to the coronavirus pandemic, NFLX’s new content production efforts is back up and the streaming service is slated to deliver more than 500 titles that are currently in post-production or preparing to be launched this year.
Recent Financial Results
GOOGL’s revenue in the fourth quarter, ended December 31, 2020 was $56.9 billion, representing a 23% increase versus the prior year. Google advertising contributed more than 80% to the top line, while the Cloud segment generated $3.8 million in revenue during the quarter. However, only Google Services segment generated operating income. GOOGL’s EPS for the quarter grew 45.3% year-over-year to $22.30.
NFLX’s revenue for the fourth quarter increased 21.5% year-over-year to $6.64 billion. Its average paid streaming memberships increased 23% year-over-year. With 8.5 million paid net additions, NFLX added a record 37 million paid memberships during the quarter. However, its adjusted EPS was $1.19, compared to a year-ago value of $1.30.
Past and Expected Financial Performance
GOOGL’s revenue and EPS grew at a CAGR of 18.1% and 48.2%, respectively, over the past three years. Also, the CAGR of the company’s free cash flow has been 14.9%.
Analysts expect GOOGL’s revenue to increase 25% in the current quarter, 24.2% in the current year and 16.8% next year. The company’s EPS is expected to grow 61.9% in the current quarter, 19% in the current year and 15.9% next year. Also, its EPS is expected to grow at a rate of 17% per annum over the next five years.
In comparison, NFLX’s revenue and EPS grew at a CAGR of 28.8% and 69.4%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 25.6%.
Analysts expect NFLX’s revenue to increase 23.7% in the current quarter, 20.3% in the current year and 15.9% next year. The company’s EPS is expected to grow 89.8% in the current quarter, 62.8% in the current year and 31.2% next year. Moreover, NFLX’s EPS is expected to grow at a rate of 44.4% per annum over the next five years.
GOOGL’s trailing-12-month revenue is more than seven times NFLX’s. In addition, it is more profitable, with a gross profit margin of 53.4% versus NFLX’s 38.9%.
NFLX’s ROE of 29.2% is greater than GOOGL’s 19%. However, GOOGL’s ROA and ROTC of 8.7% and 11%, respectively, compare favorably with NFLX’s 7.8% and 10.7%.
In terms of forward p/e, NFLX is currently trading at 55.55x, which is 80% more expensive than GOOGL, which is currently trading at 30.86x. In addition, GOOGL is less expensive in terms of trailing-12-month p/s (7.78x versus 9.67x).
In terms of trailing-12-month price/cash flow, NFLX’s 99.98x is 363.3% higher than GOOGL’s 21.58x.
GOOGL looks more affordable compared to NFLX.
GOOGL has an overall rating of A, which equates to Strong Buy in our proprietary POWR Ratings system. However, NFLX has an overall rating of C, which translates to Neutral.
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
While both GOOGL and NFLX have a Value Grade of C, GOOGL is relatively less expensive compared to NFLX.
GOOGL has a Sentiment Grade of A, reflecting greater analyst confidence, compared to a grade of B for NFLX.
While GOOGL is ranked #1 of 65 stocks in the Internet industry, NFLX is ranked #14 in the same industry.
Beyond what I have stated above, our POWR Ratings system has also rated GOOGL and NFLX for Growth, Momentum, Sentiment, Quality and Industry. Get all GOOGL ratings here. Also, click here to see the additional POWR Ratings for NFLX.
The FAANG stocks have been among the best-performing stocks of the past few years and have proved unstoppable with respect to innovation. Hence, both GOOGL and NFLX still have healthy growth potential. However, in our view, GOOGL appears to be a better buy based on the factors discussed here.
GOOGL is considered a near-monopoly in online search and advertising. The company is regarded as a “Gatekeeper” of the internet due to its dominant market share in search, bolstered by its perception as the default search provider for many browsers. Moreover, Google X’s diverse bets, which range from Waymo (driverless cars) to Verily and Calico (life sciences) to Deepmind (Artificial intelligence systems), also present immense growth opportunities for the company.
In contrast, as a pioneer media streaming company, NFLX has capitalized on consumers’ cord-cutting and a trend towards the adoption of OTT (over the top) platforms. Its recent streaming price hike, in line with its growing user base, will boost its cash flow. However, the truth is NFLX is burning cash in the quest to fund its programming. The company has reduced its dependence on outside studios and is thus running out of profitable content opportunities.
There is no doubt that GOOGL is facing several legal and regulatory challenges, especially in EU and Australia. However, it is a company with sufficiently solid fundamentals and sound financials to fight potential antitrust troubles. GOOGL is rapidly expanding its data centers to increase its presence in the cloud space to help companies leverage edge computing and 5G. Its strong focus on artificial intelligence (AI) and the home automation space should further aid its growth over the long term. Hence, we believe GOOGL will outperform its peers as well as the broader market in 2021.
You can learn about other top-rated stocks in the Internet industry by clicking here.
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GOOGL shares were trading at $2,089.71 per share on Wednesday morning, up $14.32 (+0.69%). Year-to-date, GOOGL has gained 19.23%, versus a 4.77% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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