U.S. Markets open in 4 hrs 57 mins

Better Buy: Netflix (NFLX) vs. Facebook (FB)

Brian Stoffel, The Motley Fool

Two of Wall Street's most popular names, Netflix (NASDAQ: NFLX) and Facebook (NASDAQ: FB), have finally taken a breather. In the three-year period(s) leading into their respective summer earnings releases, Netflix returned more than 300% to its shareholders, and Facebook returned 121%. In less than a month, however, the behemoths have collectively shed $135 billion in value post-earnings.

Does that mean they are good stocks to buy? And if so, which is the better stock at today's prices?

Businessman watching a movie with transparent tablet.

Image source: Getty Images.

Eighteen months ago, I asked the very same question, and Facebook came out squarely ahead. But much has changed since then. Let's see how these two stack up today.

Financial fortitude

As difficult a fact as it is to accept, the future is completely unknowable. Black swans can ruin even the most carefully laid plans. As such, financial fortitude is of the utmost importance. If chaos hit these companies -- or the macroeconomic outlook in general -- how would they fare?

In general, I like to classify companies -- relative to their balance sheets and cash flow statements -- in three groups: the fragile, the robust, and the antifragile. You can read more about these classifications here.

Keeping in mind that Facebook is valued at more than three times the size of Netflix, here's how the two compare:

Company Cash Debt Free Cash Flow
Facebook $44 billion $0 $19 billion
Netflix $2.6 billion $6.5 billion ($1.8 billion)

Data source: Yahoo! Finance. Cash includes long- and short-term investments. Free cash flow presented on trailing 12-month basis.

There's no doubt that Facebook has the upper hand here. Don't get me wrong; Netflix is definitely taking a wise approach toward developing its own content and expanding services abroad. But those investments cost a lot of money.

If no black swans hit and Netflix carries out its strategy perfectly, its investments will be well worth the risk. But if an economic -- or company-specific -- crisis hit today, Netflix would be in a very difficult position given its debt load and negative free cash flow. 

Facebook, on the other hand, could actually take advantage of such a downturn, given its stellar balance sheet and enormous cash flows. That's why even last month's bearish forecast only knocked the stock back to where it was just a few months prior. The company's strength gives investors downside protection.

Winner = Facebook


Next we have valuation -- something that is part science, part art. To get a more holistic view of how "expensive" each stock is, here are three metrics I like to consult:

Company P/E P/FCF PEG Ratio
Facebook 28 28 1.1
Netflix 157 N/A 2.0

Data source: Yahoo! Finance, E*Trade. P/E = Price-to-earnings. P/FCF = Price-to-free cash flow. PEG = Price-to-earnings growth. Non-GAAP earnings used to calculate P/E when applicable. N/A = not applicable due to negative free cash flows.

On every metric, Facebook is the cheaper stock. This isn't too surprising, as Netflix has decided to pour most of its earnings and cash flow back into developing original content. That makes it tough to get a fair look at how much Netflix is really worth. If we base price-to-earnings on expected 2019 earnings, for instance, Netflix's P/E is cut in half -- to 76.

That said, Facebook's valuation is still more attractive, and the company gets the nod once again.

Winner = Facebook

Sustainable competitive advantages

Finally, we have sustainable competitive advantages, more commonly referred to as competitive moats. Moats are what allow companies to retain their customers over time, even as competition starts encroaching. Moats also enable the magic of compounding to continue uninterrupted for decades -- which is where wealth is truly built in stock markets.

Netflix's moat remains largely unchanged from the last time I ran this analysis: The company uses the power of its brand -- and original content -- to win over customers. Once in the ecosystem, switching costs are higher than you might think. Because Netflix's service is priced so low and payments are made automatically from your credit card, a portion of customers don't even notice the payments, whether they're using Netflix or not.

That's why the company's addition of more than 25 million subscribers in the past 18 months is such a big deal: Most of them are locked in for the long haul.

Facebook, on the other hand, has been assaulted on multiple fronts. Scandals over the handling of data in the wake of the 2016 presidential election and the resulting, growing costs of providing better security have taken their toll. Future acquisitions, in the model of Instagram and WhatsApp, are likely to be challenged by authorities in the future. This limits the company's potential to stave off user attrition to other platforms.

But because of a brilliant post by tech blogger Ben Thompson, I am convinced that Facebook's moat might actually be larger than I realized 18 months ago. Consider that the increased costs for security, for instance, will have to be tackled by anyone wishing to become as large as Facebook. Because of its industry-leading position and huge war chest, this is an enormous barrier to entry for any social media site wishing to challenge Facebook without running into the same security issues.

Furthermore, because a company's digital advertising campaigns can be managed across both Facebook and Instagram (and perhaps WhatsApp and even Messenger in time) on the same platform, there might be high switching costs for advertisers involved, too. What marketing department wants to manage their budget across four platforms when it can knock two or three of the biggest ones out from the same platform?

As such, I don't think Netflix has pulled ahead of Facebook's moat, and I'm calling this a tie.

Winner = Tie

And my winner is...

So there you have it; while both companies have formidable moats, Facebook's war chest and more attractive share price give it the upper hand. Personally, I own both stocks, but Facebook accounts for a much larger portion of my portfolio (roughly 7%) for the reasons given above.

If you're looking for a reasonably priced growth company, I believe Facebook is a great place to start.

More From The Motley Fool

Brian Stoffel owns shares of Facebook and Netflix. The Motley Fool owns shares of and recommends Facebook and Netflix. The Motley Fool has a disclosure policy.

  • 7 Stocks to Buy and Hold Through Any Market Selloff

    7 Stocks to Buy and Hold Through Any Market Selloff

    Last week’s market collapse made headlines throughout the world. Since the sharp correction has negatively impacted virtually all investment sectors, you’re going to find discounted deals everywhere you look.

  • Brits Are All Making the Same Joke About the New Royal Baby

    Brits Are All Making the Same Joke About the New Royal Baby

    Meghan Markle, the Duchess of Sussex, is expecting her first child with Prince Harry. The news, announced Monday morning by Kensington Palace, has already been greeted by hundreds of messages of congratulations for the royal couple on social media. The U.K. is set to leave the European Union on March 29, exactly two years after Prime Minister Theresa May started the formal process for doing so by invoking Article 50 of the Lisbon Treaty.

  • Boeing delivers first 737 Max 8 BBJ and unveils Max 7 luxury interior (Photos)
    American City Business Journals

    Boeing delivers first 737 Max 8 BBJ and unveils Max 7 luxury interior (Photos)

    Boeing has delivered its very first 737 Max 8 business jet to a paying customer. It's the first of 20 BBJ Max jets that buyers from around the world have ordered from the Chicago-based jetmaker since they went on sale. Boeing spokesman Dmitry Krol declined to identify the buyer of the jet, which is the second of its kind made at Boeing's Renton 737 factory.

  • Here's the Average Social Security Benefit for 2019
    Motley Fool

    Here's the Average Social Security Benefit for 2019

    Millions of seniors collect Social Security, and without it, they'd be underwater on their bills. At present, the average retiree gets $1,422 a month in Social Security benefits. There's a world of misinformation surrounding Social Security, and perhaps one of the most detrimental myths out there is the notion that the program is enough to sustain seniors by itself.

  • Netflix user growth beats expectations, shares spike
    Yahoo Finance

    Netflix user growth beats expectations, shares spike

    Netflix (NFLX) reported user growth that exceeded Wall Street expectations, underscoring a recovery for the online streamer following a rare miss in new user additions last quarter.The Los Gatos, California-based company brought on 6.96 million total new streamers, beating its own guidance of 5 million total member additions for the quarter. The company issued guidance that it would add 9.4 million new members in the fourth quarter of 2018. Netflix’s stock rose 13% in late trading Tuesday.

  • Jamal Khashoggi was accidentally killed during interrogation: report
    Fox Business Videos

    Jamal Khashoggi was accidentally killed during interrogation: report

    Fox Business foreign policy analyst Walid Phares on the report that Saudi journalist Jamal Khashoggi was accidentally killed.

  • Marijuana Stocks to Watch in October -- and Into 2019
    Motley Fool

    Marijuana Stocks to Watch in October -- and Into 2019

    Tomorrow, Wednesday, Oct. 17, Canada will become the first industrialized county in the world where marijuana is legal for adult recreational use -- and only the second country, along with Uruguay, where such use is legal.  Not only does this open up

  • General Electric (GE) Stock Sinks As Market Gains: What You Should Know

    General Electric (GE) Stock Sinks As Market Gains: What You Should Know

    With this in mind, we can consider positive estimate revisions a sign of optimism about the company's business outlook. Investors can capitalize on this by using the Zacks Rank. This model considers these estimate changes and provides a simple, actionable rating system.

  • Business

    Walmart saves $200 million by changing its light bulbs and $20 million with a new floor wax

    Walmart says switching to LED lights in its parking lots cut its annual energy costs by $200 million. A change in the floor wax it uses cut costs by $20 million a year because the floors need to be buffed less often. It's exactly what Walmart WMT is doing.

  • Many U.S. mall owners say good riddance to Sears

    Many U.S. mall owners say good riddance to Sears

    The real estate investment trusts that own the malls and shopping centers where many Sears stores are anchor tenants have waited years for the retailer's demise to renovate the sites and boost rent, although redevelopment costs may strain some plans. Most large U.S. malls are controlled by REITs. In recent years, the REITs have cut their exposure to Sears Holdings Corp, which filed for Chapter 11 bankruptcy on Monday.

  • Where Will NVIDIA Be in 5 Years?
    Motley Fool

    Where Will NVIDIA Be in 5 Years?

    At one time, NVIDIA (NASDAQ: NVDA) floated under the radar in the technology sector. Its graphics processing units (GPUs) were then niche tech products that appealed mainly to graphic artists and hardcore PC gamers, but that all changed over the last

  • Saudi Arabia using the 'oil weapon option' could cause prices to soar to $150
    Business Insider

    Saudi Arabia using the 'oil weapon option' could cause prices to soar to $150

    Analysts see a 1973-style embargo as unlikely, but warn oil prices could hit triple-digits if tensions escalate. "We believe that Saudi leadership would be extremely reluctant to exercise the oil weapon option, as its reputation as the world’s stable, reliable oil central banker would be severely undercut," RBC analysts wrote in a research note.

  • 3 Stocks for Warren Buffett Fans
    Motley Fool

    3 Stocks for Warren Buffett Fans

    Warren Buffett has no shortage of acolytes, and it's easy to see why. The Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) chief and founder has made thousands of early investors in his conglomerate rich as the parent of businesses like GEICO car insurance and Burlington Northern Santa Fe railroad has posted average annual returns of 20% over the last 50 years, crushing the market. Buffett has never gotten too big for his britches, however.

  • A Look at AT&T’s Dividends
    Market Realist

    A Look at AT&T’s Dividends

    What Investors Should Know about AT&T’s Growth Prospects (Continued from Prior Part) Shareholder returns Increasing capital returns to shareholders is one of AT&T’s (T) main priorities. In the second quarter, the company returned $3.1 billion to shareholders

  • Finance

    Morgan Stanley: The stock sell-off is going to get worse

    The stock market is in the middle of a rolling bear market, says Morgan Stanley's Mike Wilson. "It's being caused by a drain in liquidity and peaking growth," Wilson says. The stock market sell-off is only going to get worse, predicts Morgan Stanley's chief U.S. equity strategist, Mike Wilson.

  • Call of the day: Tilray as Benchmark starts coverage with bullish rating
    Yahoo Finance Video

    Call of the day: Tilray as Benchmark starts coverage with bullish rating

    Benchmark initiated its coverage of Tilray with a 'buy' rating and a $200 price target. Analyst Mike Hickey said he's bullish on the cannabis company's early leadership in the medical cannabis market in Canada and its strategic alliance with Novartis.

  • Is Costco Stock a Buy or a Sell After Earnings and Sales Results?
    Motley Fool

    Is Costco Stock a Buy or a Sell After Earnings and Sales Results?

    Costco Wholesale (NASDAQ: COST) is one of the true survivors of the so-called "retail apocalypse." It hasn't just scraped by, but has continued to grow at an admirable rate. As a result, Costco stock has roughly doubled over the past five years, easily outpacing the S&P 500. The warehouse club giant reported its earnings for the fourth quarter of its 2018 fiscal year in the first week of October and released a sales update for September -- the first month of fiscal 2019 -- last week.

  • These are the bad things about early retirement that no one talks about

    These are the bad things about early retirement that no one talks about

    For all the glamour of living an early retirement lifestyle, there are plenty of negatives I’ve come to discover since I permanently left my job in 2012. As a result, you’re repeatedly forced to will yourself into action.

  • The Largest Private Employer in the World May Soon Sell Marijuana Products
    Motley Fool

    The Largest Private Employer in the World May Soon Sell Marijuana Products

    With literally hours remaining, Canada is set to lift the curtain on nine decades of recreational marijuana prohibition tomorrow. This makes Canada the first industrialized country in the world to legalize adult-use weed. As you might rightly imagine, investors can't wait for this legalization to take place.

  • Business

    30 Marijuana Stocks to Buy as the Future Turns Green

    With the previous presidential administration’s frankness on the matter, marijuana has become more blasé. Naturally, marijuana stocks have also increased in popularity, where we have more choices today than was previously thought possible. For instance, some of the top marijuana stocks are levered toward medical cannabis.

  • What could hurt marijuana stocks? Too much love from investors

    What could hurt marijuana stocks? Too much love from investors

    There is excitement about marijuana becoming legal in Canada. Many investors are eager, but astute investors are careful. The reason astute investors are careful is because they know from experience that many will make millions in marijuana stocks but many more will go bust.

  • Netflix is ditching freeloaders from subscriber forecasts after volatile stock moves

    Netflix is ditching freeloaders from subscriber forecasts after volatile stock moves

    After two consecutive quarters of missing the mark on its own forecasts for subscriber growth, Netflix Inc. hopes to put an end to the big swings in its stock with some changes in its accounting. In kicking off tech’s earnings season Tuesday, Netflix (NFLX) reported better-than-expected subscriber growth in the quarter, leading to an 11% jump in its shares in after-hours trading. Three months ago, Netflix reported weaker-than-expected subscriber growth, sending its stock tumbling around 12% in the next trading day.

  • Walmart is aggressively shifting away from its most legendary shopping format
    Yahoo Finance

    Walmart is aggressively shifting away from its most legendary shopping format

    Walmart (WMT) continues to kill off the American shopping creation it’s most known for, the massive supercenter that sells everything under one roof. With the U.S. market already having more than 3,500 Walmart supercenters and a focus by CEO Doug McMillon to increase spending on eCommerce and India, Walmart said Tuesday it will open a mere 10 supercenters in 2019. The company has reduced emphasis on the store format pioneered by founder Sam Walton – which could average a gargantuan 178,000 square feet – in recent years.

  • Finance

    Disney vs Netflix: Here's which stock would have made you richer if you invested $1,000 10 years ago

    On October 16, 1923, Walt and Roy Disney founded The Walt Disney Company and, nearly a century later, the company is one of the largest and most successful media conglomerates in the world. The answer is Netflix. According to CNBC calculations, a $1,000 investment in Netflix in October 2008 would be worth more than $97,560 as of after the earning bell on Monday, or more than 96 times as much, including price appreciation and dividends reinvested.

  • 3 Top Large-Cap Stocks to Buy in October
    Motley Fool

    3 Top Large-Cap Stocks to Buy in October

    If you're looking for high-quality large-cap stocks to add to your portfolio this month, three of our Motley Fool contributors have some ideas. Here's why you should consider Berkshire Hathaway (NYSE: BRK.B), Cisco Systems (NASDAQ: CSCO), and AT&T (NYSE: T). Tyler Crowe (Berkshire Hathaway): Perhaps one of the most ridiculous investment takes out there right now is that Berkshire Hathaway's immense cash pile isn't a good thing.