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Netflix Vs. Alphabet – The colorful fool



Netflix (NASDAQ: NFLX) and Alphabet (NASDAQ: ault) (NASDAQ: WelfL) certainly have our attention. American Netflix subscribers spend an average of one hour and 40 minutes per day watching the streaming service. The 1.8 billion active YouTube users each month stream one hour of video on their mobile devices.

Alphabet has created a tremendous source of revenue for advertising its properties, including YouTube, Google Search, and Gmail. Meanwhile, the ad-free model of Netflix is ​​building on a growing customer base and steady price hikes.

Investors who are interested in the shares of the two Internet giants may find it difficult to decide. Let's take a closer look at the current growth of both companies and their stock valuations to facilitate this decision.

  The office building of Netflix

Source: Netflix.

The Leaders of Both Megatrends

Netflix and Alphabet are at the forefront of two related megatrends: the shift to streaming video from traditional linear television (ie cable editing) and the natural shifting of advertising budgets to eyeballs from television and other traditional ones Media to follow digital media.

Netflix has nearly 60 million US subscribers and another 80 million international streaming video service subscribers. Turnover grew by 35% in 201

8 and was faster than the growth in paid memberships by 26% thanks to strategic price increases in certain markets.

With US member prices rising in early 2019, Netflix could expect another 20% increase. – Growth in US sales. This growth could slow down in the next decade as more competition enters the market and price increases are harder to sustain.

However, Netflix's strong international membership growth should continue as the content library of Netflix becomes increasingly global. Revenues from abroad increased by more than 50% in 2018 and there is no sign of a slowdown in membership growth. This was to ensure that Netflix could maintain overall high revenue growth for the foreseeable future, even if growth slowed in the domestic market.

Google continues to grow its core advertising business. Advertising revenue grew by 22% in 2018, faster than the entire digital advertising market. YouTube is a big part of this growth as Google continues to be a dominant force in Internet search. Google's cloud computing and hardware business is growing faster than its advertising business, but with lower margins. The revenues from Alphabet's other bets are irregular and currently not meaningful to the company.

Alphabet's revenue growth will continue to slow slightly due to the law of large numbers. However, if one of the other bets, such as Verily or Waymo, generates significant revenue, Alphabet could quickly revive its revenue growth.

  A Google sign that is locked on a scaffold of indoor courts.

Source: Google. 19659008] Margins in Opposite Directions

Despite Netflix's high investment in content and marketing, the company has significant operating leverage as it scales its subscriber base. Netflix posted $ 7.5 billion worth of assets in 2018, but achieved an operating margin of 10%. These two figures are expected to rise to 13% in 2019.

The growth of Netflix's content and marketing spend is beginning to slow. Management expects the cash burn to return to positive territory after remaining relatively flat this year. This indicates that sales growth is well above the growth in cost of sales and operating costs.

Alphabet tends in the opposite direction. Although the operating margin is relatively high at 27% in 2018, this number is down. Growth is driven more by lower margin products than the core Google search advertising business, including YouTube, cloud computing and hardware sales. Alphabet also pays higher traffic acquisition costs as Internet surfing increasingly shifts to the cell phone, where its own Chrome browser is less dominant.

While Alphabet's revenue growth is largely in line with Netflix, operating margin is still in the US opposite direction.

A look at the rating

Metric

Netflix

Alphabet

EV / EBITDA

91.8

16.5

P / E (TTM)

131.1

25.9

Forward P / E

52.8

24

Data Source: Yahoo! Finances.

Due to Netflix's relatively high level of debt, which is used to finance its content investments, EV / EBITDA-based debts are particularly expensive. On the basis of a forward P / E it is less expensive, but still more than twice as high as the rating of Alphabet.

Thanks to its growing operating margin over the next five years, Netflix is ​​able to increase profits much faster than Alphabet. However, this growth is much riskier due to high levels of debt, the uncertain impact of increasing competition in the near future, and the extent to which it can cope with further price increases.

Alphabet is priced relative value and still holds the significant upward trend of its Other Bets projects. As such, Alphabet is a better buy for most investors.

Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Adam Levy owns shares in Alphabet (C-Shares). The Motley Fool owns stocks of and recommends Alphabet (A-shares), Alphabet (C-shares) and Netflix. The Motley Fool has a disclosure policy.


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