FAANG is an acronym of these five major technology stocks: Facebook (now Meta) (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google (now Alphabet) (GOOGL). In the last decade, FAANG stocks gained massive momentum on the back of strong growth, lower interest rates, and a spectacular bull run that accompanied equity markets.
Even the COVID-19 pandemic acted as a tailwind for FAANG stocks as demand for their suite of products and services experienced an uptick in the last two years.
However, due to multiple macro-economic factors, most of these stocks are trading significantly below all-time highs. Right now, Netflix stock is down 70% from record highs while Meta stock has fallen 41% from record prices. Let’s see which of these two beaten-down FAANG stocks is a better buy right now.
Netflix enjoyed a first-mover advantage as it was the first streaming platform in the world. However, as the streaming market expanded at an astonishing pace, several players including Apple, Amazon, Disney (DIS), Comcast (CMCSA), and Warner Bros. Discovery (WBD) entered the fray.
Most of these companies have diversified businesses allowing them to plow in capital and even burn cash to increase their subscriber base. Alternatively, Netflix is a pure-play streaming company reducing its financial flexibility when compared to Apple, Amazon, and Disney.
Netflix in fact lost subscribers for the first time in 10 years which indicates its subscriber base may have peaked.
Additionally, creating original content is an expensive process and Netflix spent $17 billion last year to produce content while generating $29.7 billion in sales. On the other hand, Disney, which has much deeper pockets, spent $25 billion on content production in 2021 while already having an enviable content library with classic franchises such as Marvel and Star Wars.
Netflix also hinted it might consider an ad-supported model and further monetize accounts that are sharing passwords to boost revenue.
In Q1 of 2022, Meta Platforms increased sales by 7% year over year which was the slowest ever rate of growth. Comparatively, in Q1 of 2021, FB sales grew by more than 47% year over year. Meta has been impacted by Apple’s policy changes which have hurt the company’s ability to sell targeted ads to customers. As a result, the per ad sales declined by 8% in Q1.
At its midpoint guidance, Meta forecast sales of $29 billion for Q2, which is similar to the year-ago period. Due to sluggish revenue growth, Meta will clamp down on operating expenses and forecast spending to reduce to $89.5 billion this year, compared to its earlier guidance of $92.5 billion.
A key revenue driver for Meta Platforms going ahead will be its bet on the Metaverse. While ad-sales account for more than 95% of revenue right now, Reality Labs business generated $695 million in the March quarter. However, the segment also reported an operating loss of almost $3 billion.
We can see why both Meta Platforms and Netflix have underperformed equity markets in the last 12-months. But the sell-off has meant FB stock is valued at a price to sales multiple of 4.7x while Netflix is valued at less than three times forward sales. Comparatively, FB is trading at a price to earnings multiple of 18.6x while this ratio for NFLX stock is similar at 18.7x.
While Meta is a much larger player, I believe Netflix’s lower valuation will provide investors with significant upside potential, making the streaming heavyweight a better investment today.
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NFLX shares fell $3.21 (-1.57%) in premarket trading Thursday. Year-to-date, NFLX has declined -66.83%, versus a -10.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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