Best Bear Market Buy: Netflix vs. Amazon

In today’s volatile market, it’s not hard to find growth stocks trading at huge discounts from their highs. Amazon (AMZN -0.68%) and netflix (NFLX -1.21%) two FAANG stocks are trading well below peak levels, and investors might wonder which former highflier is the better buy. Read on to see where two Motley Fool contributors weigh in on this tech stock valuation debate.

Netflix is ​​the pioneer of streaming content

Parkev Tatevosyan: Netflix has pioneered a new form of content consumption via streaming. The company had 222 million subscribers as of March 31. Much has been said about its slowing subscriber growth. Netflix lost 200,000 subscribers in its last quarter and expects a loss of 2 million more in the current quarter. The market did not react well to these latest figures and accelerated the sell-off in stocks. However, investors may have overreacted to the bad news.

PE NFLX report given by Y-Charts.

Netflix stock is trading at a price-to-earnings ratio of 16.9, which is the lowest in five years. Meanwhile, growth was expected to slow following the surge in subscriber additions at the start of the pandemic that drove strong growth. The economic reopening has created more options for what people can do with their time, and after being cooped up at home for over a year, it’s understandable that they want to get out of the house and use Netflix less. .

This change in user pace should not be confused with a structural drop in demand for Netflix’s services. For less than $20 a month, a family can get accessible entertainment anywhere they can take a mobile device or have Internet access. This excellent customer value proposition will likely fuel growth for many years to come.

At Netflix’s scale, it was already good enough to generate $29.7 billion in revenue and $6.2 billion in operating profit in 2021. It has fundamental economies of scale that are growing rapidly earnings with additional revenue growth. Indeed, it will cost Netflix about the same to show its content to 500 million subscribers as it did to 200 million.

Amazon is built for growth with a strong moat

Keith Noonan: Amazon shares have fallen about 30% year-to-date and 39% from their all-time high. With the company’s valuation at around 2.3 times this year’s expected sales and 143 times expected earnings, it still has a much more growth-dependent valuation than Netflix. However, I also think it’s a better buy for long-term investors.

With fuel costs and other shipping and logistics costs rising, Amazon’s e-commerce business is currently facing major headwinds. Combined with significant investment in online retail infrastructure and technology spending, current conditions are currently creating significant setbacks to profitability. However, Amazon Web Services continues to make up a larger portion of the company’s overall sales profile, and the company has a strong position in the industry and a fantastic net income margin. Despite rising spending, Amazon’s e-commerce and cloud infrastructure segments look incredibly well positioned for long-term growth, and competitors will be hard pressed to disrupt the company’s dominant positions in these areas. .

Meanwhile, Netflix has a lot of debt, and it looks like the business model that was once so successful for the company is no longer capable of delivering the kind of performance investors are looking for. While the streaming leader has undeniably created some big hits, it also seems to have pursued a quantitative rather than qualitative approach to growing its library, and its content has lost some shine now that its competitors are quickly finding their way into the mainstream. streaming space. I wouldn’t be shocked to see Netflix shares rebound from recent price lows, but the company doesn’t seem so special to me anymore.

So what’s the best buy?

When it comes to choosing between Amazon and Netflix, investors should probably start by deciding which company looks stronger to them, then balance that valuation against growth expectations and valuation levels. If you’re looking for a more value-oriented stock with a valuation less reliant on growth, Netflix may prove to be the best buy. However, if you’re more concerned with long-term moats and market positioning, Amazon might be a better choice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. keith noonan has no position in the stocks mentioned. Parkev Tatevosian has positions in Netflix. The Motley Fool holds positions and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.

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