Meta Platforms, Inc. (FB) in Menlo Park, Calif., develops products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and in-home devices worldwide. It operates in two segments, Family of Apps and Facebook Reality Labs. In comparison, Los Gatos, Calif.-based Netflix, Inc. (NFLX) provides entertainment services. It offers TV series, documentaries, and feature films across various genres and languages. The company offers members the ability to receive streaming content through a host of Internet-connected devices.
Even though global supply chain constraints, high inflation, and labor shortage could mar the technology industry’s growth in the near term, FAANG, which represents Meta (formerly known as Facebook), Amazon, Apple, Netflix, and Alphabet (GOOG) (formerly known as Google), is gaining attention after reporting strong third-quarter results. While the Federal Reserve doubled the rate at which it is tapering its asset purchases and expects three interest rate hikes next year, the benchmark interest rates remain unchanged for now and should act as a growth catalyst in the near term. Furthermore, increasing demand for advanced tech products and services amid the accelerating digital transformation should keep driving the technology industry's growth. According to GoRemotely, the U.S. tech industry is expected to reach a market value of $5 trillion by the end of 2021. Therefore, both FB and NFLX should benefit.
FB’s stock has gained 21.7% in price over the past year, while NFLX has returned 14.5%. Also, FB’s 24.3% gains over the past nine months are higher than NFLX’s 15.4% returns. And FB is the clear winner with 22.2% gains versus NFLX’s 10.6% 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 28, 2021, At Connect 2021, FB’s CEO Mark Zuckerberg introduced Meta, bringing together Facebook's apps and technologies under one new company brand. Meta's focus will be to exploit the metaverse, help people connect, find communities, and grow businesses.
On November 22, 2021, NFLX announced plans to acquire Scanline VFX, one of the world's most creative and innovative VFX studios. This move should ensure that NFLX’s creators have access to the world's most innovative tech and continue to bring the most compelling and cutting-edge storytelling to their members.
Recent Financial Results
FB’s total revenue increased 35% year-over-year to $29.01 billion for its fiscal third quarter, ended September 30, 2021. The company’s income from operations grew 30% year-over-year to $10.42 billion, while its net income came in at $9.19 billion, representing a 17% year-over-year increase. Also, its EPS was $3.22, up 19% year-over-year.
NFLX’s total revenue 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
FB’s revenue and levered FCF have grown at CAGRs of 29.4% and 32.2%, respectively, over the past three years. Analysts expect FB’s revenue to increase 36.9% in its fiscal 2021 and 19% in fiscal 2022. The company’s EPS is expected to grow 38.3% in fiscal 2021 and 2.2% in fiscal 2022. Furthermore, its EPS is expected to grow at 21.4% per annum over the next five years.
In comparison, NFLX’s revenue and levered FCF have grown at CAGRs of 24.3% and 21.1%, respectively, over the past three years. The company’s revenue is expected to increase 18.8% in its fiscal 2021 and 14.8% in fiscal 2022. Its EPS is expected to grow 76.6% in fiscal 2021 and 22.2% in fiscal 2022. Also, NFLX’s EPS is expected to grow at 42.6% per annum over the next five years.
Profitability
FB’s trailing-12-month revenue is 3.92 times NFLX’s. FB is also relatively more profitable with gross profit and net income margins of 80.85% and 35.88%, respectively, compared to NFLX’s 43.22% and 17.64%.
Furthermore, FB’s ROA and ROTC of 18.57% and 21.30%, respectively, are higher than NFLX’s 10.01% and 13.18%.
Valuation
In terms of forward non-GAAP P/E, NFLX is currently trading at 56.51x, which is 130.9% higher than FB’s 24.47x. And NFLX’s 41.34x forward EV/EBITDA ratio is 201.1% higher than FB’s 13.73x.
So, FB is relatively affordable here.
POWR Ratings
FB has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, NFLX has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Both FB and NFLX have a B grade for Sentiment, which is in sync with favorable analyst sentiment.
Moreover, FB has an A grade for Quality. This is justified given FB's 23.77% trailing-12-month ROTA, which is 693.1% higher than the 3% industry average. On the other hand, NFLX has a Quality grade of B.
Of the 77 stocks in the Internet industry, FB is ranked #9. In comparison, NFLX is ranked #21.
Beyond what I have stated above, we have also rated the stocks for Growth, Value, Stability, and Momentum. Click here to view all the FB 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 FB and NFLX are expected to gain, we think it is better to bet on FB because of its lower valuation and higher profitability.
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.
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FB shares rose $1.58 (+0.46%) in premarket trading Thursday. Year-to-date, FB has gained 25.71%, versus a 27.94% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
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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