Should You Pick Netflix Stock Over Microsoft?

by Trefis Team
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Microsoft stock (NASDAQ:MSFT) has rallied by about 130% since the beginning of 2018, slightly outpacing Netflix stock (NASDAQ: NFLX) which is up by about 120% over the same period. That’s good for Microsoft, but is it justified? We don’t think it is, due to a couple of reasons. Firstly, Netflix’s revenue growth rate was over 2x Microsoft’s between 2017 and 2019 (72% vs. 30%). Secondly, while Microsoft’s margins are thicker, with Net Margins (net income, or profits after all expenses and taxes, calculated as a percent of revenues) standing at about 31% in FY’19, Netflix has been making solid progress improving its margins (net margins roughly doubled from 4.8% to 9.3% over the last two years). Our dashboard Netflix vs. Microsoft: Does The Stock Price Movement Make Sense? has the underlying numbers behind our belief that Netflix is likely the stronger investment presently, compared to Microsoft.

How Do The Core Businesses For Netflix And Microsoft Compare?

Let’s look at the core business prospects of the two companies a little more closely. Netflix has become a force to reckon with in the streaming video space, and the company has been seeing higher demand for its services as people are confined to their homes due to Coronavirus related lockdowns. For example, over Q1’20, the company delivered global net subscriber additions of 15.8 million, double the Wall Street consensus of roughly 8 million. Microsoft is also benefiting from the pandemic, with demand for its Azure cloud solutions likely to rise as more business moves online. The company will also gain from the work-from-home trend, as companies invest in productivity and collaboration software to empower their increasingly distributed workforces.

That said, we believe Netflix could have more upside going forward due to more promising earnings growth prospects. We expect Netflix Revenue growth to be stronger in the medium -term, rising by about 15% per year over the next five years, driven by its international expansion and continued price increases. In comparison, Microsoft’s Revenue could grow at less than 10% over the same period, driven by tough competition from Cloud leader Amazon and from Google’s fast-growing offering (52% y-o-y revenue growth in Q1 2020).  Moreover, we think Netflix has far more scope to boost margins, driven by better absorption of content costs as revenues scale-up. This should enable quicker earnings growth compared to Microsoft. Yes, Netflix’s higher valuation of 100x trailing EPS factors in some of its growth, versus 37x for Microsoft, but there may be room for more price appreciation, as we outline in our analysis Netflix Stock: An Easy 2x

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