We think that Netflix stock (NASDAQ: NFLX) currently is a better pick compared to Eli Lilly stock (NYSE: LLY), given its better prospects and a comparatively lower valuation. LLY stock trades at about 10.2x trailing revenues, compared to 5.1x for NFLX stock. Although both the companies saw a rise in revenue over the last year or so, Netflix’s growth has been better. Some of Eli Lilly’s drugs, including diabetes drug Trulicity and its Covid-19 treatment, have aided its top-line expansion. For Netflix, its revenue growth was buoyed during the pandemic, with people staying indoors, relying more on streaming services for entertainment. While these companies are from different sectors, we compare them given their similar revenue base.
Looking at stock returns, LLY, with a solid 59% return over the last twelve months, has significantly outperformed NFLX, which saw a 39% decline. This compares with 6% gains for the broader S&P 500 index. The rise in LLY stock is partly aided by hopes for regulatory approval for its Alzheimer’s treatment – Donanemab – which, if approved, will be a multi-billion dollar opportunity for Eli Lilly. On the other hand, NFLX stock is being weighed down due to its slowing subscriber growth. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth and operating margin growth. Our dashboard Netflix vs. Eli Lilly: Which Stock Is A Better Bet? has more details. Parts of the analysis are summarized below.
1. Netflix’s Revenue Growth Has Been Stronger
- Both companies posted sales growth over the last twelve months. Still, Netflix’s revenue growth of 19% is higher than 15% for Eli Lilly.
- Looking at a longer time frame, Netflix’s sales grew a solid 88% to $29.7 billion in 2021, compared to $15.8 billion in 2018, while Eli Lilly’s sales grew 32% to $28.3 billion in 2021, compared to $21.5 billion in 2018.
- Subscriber additions and better pricing have driven Netflix’s revenue growth over the recent past. Netflix’s average paying memberships grew 11%, while its average monthly revenue per paying membership grew 7% y-o-y in 2021.
- Furthermore, the company recently announced a new price hike in the United Kingdom and Ireland, raising prices by 10% on its standard plan and by almost 15% on its premium ultra-high-definition plan, which will aid its revenue growth.
- Eli Lilly’s revenue growth has been driven by continued market share gains for drugs, such as Trulicty, Verzenio, and Olumiant, and its Covid-19 treatment.
- Eli Lilly has a robust product cycle, including Alzheimer’s treatment – Donanemab, and diabetes drug – Tirzepatide. The combined peak revenue for these drugs alone is pegged at over $11 billion.
- Our Netflix Revenue and Eli Lilly Revenue dashboards provide more insight into the companies’ sales.
- Netflix’s revenue is expected to grow faster than Eli Lilly’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 17.5% for Netflix, compared to a just 2.4% CAGR for Eli Lilly, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Netflix Is More Profitable
- Netflix’s operating margin of 23% over the last twelve months is marginally higher than 21% for Eli Lilly.
- This compares with 16% and 22% figures seen in 2019, before the pandemic, respectively. Netflix’s operating margins have seen a gradual rise over the recent years, while Eli Lilly’s have remained rangebound.
- However, Eli Lilly’s free cash flow margin of 26% is much better than 1% for Netflix.
- Our Netflix Operating Income and Eli Lilly Operating Income dashboards have more details.
- Looking at financial risk, Netflix’s 10% debt as a percentage of equity is higher than 6% for Eli Lilly, while its 13% cash as a percentage of assets is also higher than 8% for Eli Lilly, implying that Eli Lilly has a better debt position and Netflix has more cash cushion.
3. The Net of It All
- We see that Netflix has demonstrated better revenue growth; it is more profitable, has more cash cushion, and is available at a comparatively lower valuation than Eli Lilly. Going by historical performance, Netflix is the better pick of the two.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we still believe Netflix is currently the better choice.
- The table below summarizes our revenue and return expectation for both companies over the next three years and points to an expected return of 62% for NFLX over this period vs. a -10% expected return for LLY stock, implying that investors are better off buying NFLX over LLY, based on Trefis Machine Learning analysis – Netflix vs. Eli Lilly – which also provides more details on how we arrive at these numbers.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Eli Lilly vs. Alphabet.
|S&P 500 Return||-2%||-7%||99%|
|Trefis Multi-Strategy Portfolio||-1%||-9%||259%|
 Month-to-date and year-to-date as of 4/18/2022
 Cumulative total returns since the end of 2016