Alphabet vs. Netflix: Which FAANG Stock is a Better Stock to Own for the Rest of 2021?

Alphabet Inc. (GOOGL) provides online advertising services. The company offers performance and brand advertising services. It operates through Google Services, Google Cloud, and Other Bets segments. In comparison,  Netflix, Inc. (NFLX) provides entertainment services. It offers TV series, documentaries, and feature films across various genres and languages. The company has approximately 204 million paid members in 190 countries.

Even though global supply chain constraints and high inflation could mar the technology industry’s growth in the near term, FAANG stocks are again attracting attention after reporting strong third-quarter results. The Federal Reserve’s decision to keep benchmark interest rates unchanged should act as a growth catalyst. Furthermore,  increasing demand for advanced tech products and services amid the accelerating digital transformation of several businesses should keep driving the technology industry's growth. According to GoRemotely, the U.S. tech industry is expected to reach  $5 trillion by the end of 2021.

NFLX’s shares have gained 29.2% in price over the past three months, while GOOGL has returned 9.7%. However, GOOGL’s 44.4% gains over the past nine months are significantly higher than NFLX’s 21% returns. And GOOGL is the clear winner with 69.2% gains versus NFLX’s 23.6% returns in terms of year-to-date performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On October 26, Sundar Pichai, CEO of Alphabet, said, “This quarter’s results show how our investments there are enabling us to build more helpful products for people and our partners. Ongoing improvements to Search, and the new Pixel 6, are great examples. And as the digital transformation and shift to hybrid work continue, our Cloud services are helping organizations collaborate and stay secure.”

On November 2, 2021, NFLX launched Netflix games on mobile. Mike Verdu, VP of Game Development, said, “We want to begin to build a library of games that offers something for everyone. We’re in the early days of creating a great gaming experience, and we’re excited to take you on this journey with us.”

Recent Financial Results

GOOGL’s revenues increased 41% year-over-year to $65.12 billion for its  fiscal third quarter ended September 30, 2021. The company’s operating income grew 87.5% year-over-year to $21.03 billion, while its net income came in at $18.94 billion, representing a 68.4% year-over-year increase. Also, its EPS was  $27.99, up 70.7% year-over-year.

NFLX’s revenues increased 16.3% year-over-year to $7.48 billion for its  fiscal third quarter, ended September 30, 2021. The company’s operating income grew 33.5% year-over-year to $1.76 billion, while its net income came in at $1.45 billion, representing an 83.4% year-over-year increase. Also, its EPS was $3.19, up 83.3% year-over-year.

Past and Expected Financial Performance

GOOGL’s revenue and EPS have grown at CAGRs of 22.6% and 57.4%, respectively, over the past three years. Analysts expect GOOGL’s revenue to increase 26.6% for the quarter ending December 31, 2021, and 39.3% in its fiscal year 2021. The company’s EPS is expected to grow 21.8% for the quarter ending December 31, 2021, and 85.4% in its fiscal year 2021. Furthermore,  its EPS is expected to grow at a 21% rate per annum over the next five years.

NFLX’s revenue and EPS have grown  at CAGRs of 24.3% and 58.2%, respectively, over the past three years. The company’s revenue is expected to increase 16.2% for the quarter ending December 31, 2021, and 18.9% in its fiscal year 2021. Its EPS is expected to decline 31.1% for the quarter ending December 31, 2021 and grow 76.5% in fiscal 2021. Also, NFLX’s EPS is expected to grow at a 42.6% rate per annum over the next five years.

Profitability

GOOGL’s $239.21 billion trailing-12-month revenue is significantly higher than NFLX’s $28.63 billion. GOOGL is also more profitable, with gross profit  and net income margins of 56.51% and 29.52%, respectively, compared to NFLX’s 43.22% and 17.64%.

Moreover, GOOGL’s 14.01% and 17.66% respective ROA and ROTC are higher than NFLX’s 10.01% and 13.18%.

Valuation

In terms of its forward non-GAAP P/E, NFLX is currently trading at 62.29x, which is 125.7% higher than GOOGL’s 27.60x. Moreover, NFLX’s 46.16x forward EV/EBITDA ratio is 168.8% higher than GOOGL’s 17.17x.

So, GOOGL is relatively affordable here.

POWR Ratings

GOOGL has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, NFLX has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Both GOOGL and NFLX have a grade of B for Quality. This is justified given their higher-than-industry profitability ratios.

GOOGL has an A grade for Sentiment and a C grade for Growth, consistent with analysts’ expectations that its EPS will increase in the coming months. In comparison, NFLX has a C grade for Sentiment and a D grade for Growth, which are in sync with analysts’ expectations that its EPS will decline in the near term.

Of the 78 stocks in the Internet industry, GOOGL is ranked #3. While NFLX is ranked #20.

Beyond what I have stated above, we have also rated the stocks for Stability, Value, and Momentum. Click here to view all the GOOGL ratings. Also, get all the NFLX ratings here.

The Winner

The FAANG stocks are expected to grow steadily amid the continuing low-interest-rate environment. While both GOOGL and NFLX are expected to gain, we think it is better to bet on GOOGL now because of its lower valuation, higher profitability, and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Internet industry here.

GOOGL shares were trading at $2,980.70 per share on Friday afternoon, up $15.35 (+0.52%). Year-to-date, GOOGL has gained 70.07%, versus a 26.59% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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