The market still can’t get seem to get enough of FANG stocks (Facebook, Amazon.com, Netflix (NASDAQ: NFLX), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL)), and the two companies bringing up the rear of that acronym –Netflix and Google parent Alphabet — are still riding high with investors. Shares of Netflix and Alphabet rose 55% and 36%, respectively, in 2017, but what ultimately matters now is which one of the two tech bellwethers will lead the way in 2018.
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Netflix has been the top dog in recent years. The leading premium streaming service was even the best-performing S&P 500 stock in 2013 and 2015. Alphabet’s gains haven’t been as transformative, but the search giant has been a consistent producer as the top dog in online advertising.
Growth and valuation
Netflix takes top honors in terms of recent capital appreciation, and the momentum is justified given Netflix’s heady growth. Revenue is on pace to climb 33% in 2017, its healthiest showing since 2011. Strong international subscriber additions and an audience that isn’t flinching at subtle price increases are fueling the accelerating growth.
Alphabet is no slouch, and it too is capping off what should be back-to-back years of accelerating top-line growth. However, Alphabet’s expected 22% top-line growth is two-thirds of Netflix’s pace. Looking at 2018 — with analysts seeing decelerating growth for both companies — Netflix also comes out ahead, as Wall Street pros see 28% growth there relative to a 19% targeting uptick for Alphabet.
Netflix has recent momentum and heartier revenue growth in its favor, but Alphabet steps up when it comes to valuation. Alphabet fetches 30 times trailing earnings, not a low multiple but a relative bargain when pitted against Netflix and its triple-digit ratio.
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Netflix isn’t cheap on an earnings basis, largely because it doesn’t generate the same kind of double-digit net profit margin that Alphabet consistently cranks out. Netflix is investing in content and international expansion, unlike Alphabet’s high-margin online advertising stronghold that affords it the opportunity to delve into new ventures without stinging its bottom line. Streaming video doesn’t come cheap.
The good news for Netflix is that it’s turning the corner in many of its abroad markets, and it’s seizing the scalability inherent in building up a premium streaming platform serving more than 109 million subscribers — and counting. Analysts see earnings nearly doubling in 2018, a move that lowers its forward earnings multiple into the high double digits.
Alphabet is no slouch when it comes to earnings growth. Wall Street sees Google’s parent growing its earnings per share 29% this year for a forward earnings multiple of 26.
The bottom line
Netflix wins the momentum and growth rounds, but Alphabet punches back hard on relative valuation. Then there is risk, and it’s a round that Alphabet wins but not as easily as one might think.
A knock on Netflix is that it’s just a distributor of content, but it packs a bigger moat than some people think. There is no other service out there able to spend the $7 billion to $8 billion a year that Netflix will dedicate to content. Netflix has also proven to be recession-resistant. When times are tight, Netflix offers attractively priced entertainment for pocket change a day. It’s not a coincidence that Netflix was one of the few stocks to rise in 2008 as the global financial crisis rocked the equity markets.
Alphabet is still the steadier long-term play. It’s the top dog in search and online advertising, and while the rise of social media has shifted ad dollars and tweaked the way we cull information online, Google is still the starting spot of choice for the growing internet-connected masses.
Netflix and Alphabet should continue to beat the market in 2018, but the overall nod ultimately goes to Netflix. It is growing revenue, earnings, and its stock price a lot faster than Google’s parent. Alphabet takes the valuation and risk-averse rounds, but Netflix is closing the gap on valuation now that bottom-line growth is picking up and it’s been a resilient performer during market downturns.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Netflix. The Motley Fool has a disclosure policy.
