Amazon (AMZN +0.15%) and Netflix (NFLX +0.44%) are two of the five members of the FAANG tech cohort, which also includes Facebook, Apple, and Google's parent company Alphabet.
Over the past month, I compared Facebook to Apple and weighed the pros and cons of buying Alphabet's stock. Today, I'll compare the two remaining FAANG stocks, Amazon and Netflix, and see which is the better buy.
Different starting points, intersecting destinies
Amazon and Netflix started out in different markets, but their interests are gradually overlapping. Amazon disrupted the retail market with its e-commerce marketplace and dominated the cloud platform market with Amazon Web Services (AWS). Netflix started out as a DVD rental service, which then evolved into the world's largest paid streaming video platform.
Image source: Getty Images.
But in 2006, Amazon chased Netflix into the video rental space with a digital download platform called Unbox. That platform eventually evolved into Prime Video, one of Netflix's largest competitors in the premium streaming market. Amazon also subsequently expanded that ecosystem with its Fire TV streaming devices as it entered the video game market.
Over the past year, Netflix gradually expanded into Amazon's backyard with an e-commerce website for tie-in apparel and products, then launched a new platform for mobile games. The expansion of that ecosystem could widen Netflix's moat against Amazon Prime, which provides retail discounts, free shipping options, access to Prime Video, Prime Music, and other digital perks to over 200 million subscribers worldwide.
Different business models
Amazon and Netflix are gradually becoming competitors, but their core business models are still very different.
Amazon generates most of its revenue from its retail business, but it generates most of its profits from AWS, whose higher-margin revenue enables Amazon to expand its retail ecosystem with aggressive discounts, cheap hardware devices, and brick-and-mortar investments. AWS revenue also supports the development of fresh content for Prime's streaming platforms.
Netflix generates nearly all of its revenue from subscription fees. It served 213.6 million paid subscribers worldwide last quarter, and has repeatedly resisted calls to launch a free or cheaper ad-supported tier.
Which company is growing faster?
Both companies experienced strong revenue growth throughout the pandemic as more people stayed at home, shopped online more frequently, and watched more streaming videos.
Amazon's revenue rose 38% in 2020 as its earnings per share jumped 82%. But this year, analysts expect its revenue and earnings to grow just 23% and 26%, respectively, as the pandemic-related tailwinds fade.
Next year, analysts expect Amazon's revenue to rise 18% and for its earnings to increase 26%. Its retail business will continue to face tough year-over-year comparisons, but AWS' growth should buoy its earnings growth.
Netflix's revenue rose 24% in 2020 as its EPS increased 47%. The company expects to finish 2021 with 222.1 million subscribers, up 9% from a year ago, while analysts expect its revenue and earnings to rise 19% and 72%, respectively, for the full year.
But next year, analysts expect Netflix's revenue and earnings to rise 15% and 24%, respectively, against tough year-over-year comparisons. It also faces intense competition from Disney, AT&T's HBO Max, and Amazon in the streaming race. And it will need to increase its spending to develop more hit shows, like this year's Squid Game, to keep expanding.
Amazon and Netflix both trade at just under 50 times forward earnings. Those forward P/E ratios are reasonable relative to their growth rates, and make them cheaper growth plays than many other hyper growth stocks.
Which FAANG stock is the better buy?
Amazon and Netflix are both solid long-term investments. But if I had to pick one over the other, I'd stick with Amazon for three simple reasons.
First, AWS gives Amazon's retail business a killer advantage against other online and brick-and-mortar retailers. Second, its business is much better diversified than Netflix's subscription-based platform. Lastly, AWS' profits enable it to continuously expand its Prime ecosystem with low-margin and loss-leading strategies (including pricey shows, movies, and games) to challenge Netflix and other companies in their respective markets.
Meanwhile, Netflix faces a growing number of well-funded competitors that own larger portfolios of legacy content and lucrative intellectual property. It might keep churning out unique hits like Stranger Things or Squid Game to lock in viewers, but it could eventually suffer a creative drought. If that happens, Netflix's stock could underperform Amazon's as its growth stalls out.
