NFLX: Netflix vs. Pinterest: Which Stay-at-Home Stock is a Better Buy?

Netflix, Inc. (NFLX) and Pinterest, Inc. (PINS) has been receiving significant attention amid the pandemic. The uncomfortable number of increases in coronavirus infections could bring the country to a halt again. Hence, school closure, shelter-in-place guidelines, and work from home will give people more time to engage in social viewing, helping both the companies benefit further.

Both the stocks generated decent returns over the past year. While PINS returned 255.8% over this period, NFLX gained 53.7%. In terms of year-to-date performance as well, PINS is a clear winner with 261.7% returns versus NFLX’s 49.9%. But which of these stocks is a better pick now?

Let’s find out.

Business Structure and Latest Movements

NFLX is widely known as the streaming giant due to its dominance in the sector. The company offers streaming services and engages in the internet delivery of TV shows and movies directly on TVs, computers, and mobile devices in the United States and internationally. The platform has over 195 million global paid members.

The company’s focus on creating original content has been one of the key drivers of subscriber growth in the last decade. NFLX caters to a wide range of users and has invested heavily in developing content. Consequently, the company continues to invest heavily in local language content as part of its international expansion. However, the company has been facing a potential shortage of films and movies as production remained suspended during the first half of this year.

PINS provides a visual discovery engine in the United States and internationally. The company’s engine allows people to find inspiration for their lives, including recipes, home and style ideas, travel destinations, and others. PINS engage in pinboard-style photo-sharing website operations and allows its users to create and manage theme-based image collections.

The company is presently experimenting with a new feature that explores virtual events including online classrooms. The feature would connect users to a common meeting room through Zoom Video Communications’ (ZM) video calling app, while the PINS board will be available for organizing study materials and other resources. Moreover, users can interact using a group chat option.

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Recent Financial Results

NFLX’s revenue for the third quarter ended September 2020 grew 22.7% year-over-year to $6.44 billion. Average streaming paid memberships rose 25% while streaming ARPU decreased 1.6% year-over-year. However, growth has slowed with 2.2 million net additions of paid members during the quarter compared to the year-ago net adds of 6.8 million. NFLX’s EPS grew by 18.4% to $1.47.

In the third quarter ended September 2020, PINS’ total net revenue increased 58% year-over-year to $443 million as advertisers returned to the platform following the peak in the first wave of the pandemic. International revenue surged 145% year-over-year. Global monthly active users (MAUs) grew 37% year-over-year to 442 million. The company reported a loss of $0.16 per share, significantly improving from the year-ago loss of $0.23 per share.

PINS is in an advantageous position here.

Past and Expected Financial Performance

NFLX’s revenue and EPS grew at a CAGR of 26.2% and 98.4%, respectively, over the past twelve months.

The market expects NFLX’s revenue to increase by 20.7% in the current quarter, 23.8% in the current year, and 18% next year. The company’s EPS is expected to grow 6.2% in the current quarter, 51.8% in the current year, and 44% next year. Moreover, NFLX’s EPS is expected to grow at a rate of 41% per annum over the next five years.

On the other hand, while PINS’ revenue grew at a CAGR of 36.5% over the past twelve months, its EPS declined at a CAGR of 87.3% during the same period.

The market expects the company’s revenue to increase by 60.7% in the current quarter, 42.6% in the current year, and 41.5% next year. PINS’ EPS is expected to grow 166.7% in the current quarter, and 117.2% next year. Moreover, EPS is expected to grow at a rate of 152.3% per annum over the next five years.

PINS have an edge over NFLX here as well.

Profitability

NFLX’s trailing-12-month revenue is more than 17 times what PINS generates. But PINS is the more profitable with a gross profit margin of 70% versus NFLX’s 38.8%.

However, NFLX’s ROE and ROA of 32.6% and 7.6% compare favorably with PINS negative value.

Valuation

In terms of trailing P/S, PINS is currently trading at 28.74x, 222.2% more expensive than NFLX which is currently trading at 8.92x. However, PINS is less expensive in terms of trailing-12-month P/B (20.36x versus 20.65x), but its forward PEG of 7.71x is 222.6% higher than NFLX’s 2.39x.

Though PINS looks much more expensive compared to NFLX, it’s worth paying this premium considering PINS’ significantly higher earnings growth potential.

POWR Ratings

While PINS is rated “Strong Buy” in our proprietary POWR Ratings system, NFLX is rated “Neutral.” Here are how the four components of overall POWR Rating are graded for NFLX and PINS:

NFLX has an “A” for Industry Rank, and a “C” for Trade Grade, Buy & Hold Grade, and Peer Grade. In the 59-stock Internet industry, it is ranked #25. On the other hand, PINS have an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank.

The Winner

While both NFLX and PINS are good long-term investments considering their user engagement and continued market expansion, PINS appears to be a better buy based on the factors discussed here.

PINS is popular amongst the Generation Z and millennial age cohorts, primarily located outside of the United States. Unlike more mature social media platforms, PINS still has room to grow and monetize its user base. The pandemic has shown that PINS’ business is resilient. Hence, its premium valuation is justified.

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NFLX shares were trading at $488.16 per share on Friday morning, up $3.16 (+0.65%). Year-to-date, NFLX has gained 50.87%, versus a 14.71% 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...