COVID-19 has crushed several sectors but has also created unexpected opportunities for e-commerce, gaming and video streaming companies. Netflix and Amazon, which are part of the FAANG cohort (the other three being Facebook, Apple and Google’s parent Alphabet) have gained immensely from the shelter-at-home mandates to curb the coronavirus pandemic.
Using the TipRanks’ Stock Comparison tool, we will compare these two tech behemoths to see which stock offers the most compelling investment opportunity.
This image has an empty alt attribute; its file name is NFLX-vs-AMZN-1.png
Netflix’s first-mover advantage helped it emerge as the market leader in streaming services. Its subscription video on demand business has grown rapidly over the years due to the quality original content that the company provides at affordable prices.
The pandemic accelerated the shift from the traditional linear TV to the streaming platform. As per a report by Media Play News, the US streaming video consumption has more than doubled since the pandemic based on data from 7Park. Subscription video on demand usage increased to almost 600 minutes per month since mid-March compared to less than 300 minutes in June 2019. It crossed 700 minutes in April but came down to the mid-600 range in May and June.
Netflix gained 15.8 million subscribers in the first quarter and 10.1 million in the second quarter due to pandemic-led demand. This growth compares with 28 million additions in the entire 2019. However, the company cautioned that the growth in paid memberships is slowing.
Netflix’s prediction of 2.5 million subscriber additions in the third quarter reflected a sequential slow down as well as a year-over-year decline compared to 6.8 million in 2019’s third quarter.
There are concerns about Netflix reaching saturation in the US market. However, Bernstein analyst Todd Juenger believes that an aging population offers a long-term user growth opportunity. The analyst noted that the 5.7 million subscription additions in the US and Canada in the first half was “largely fueled by older age cohorts.”
He also believes that as Netflix’s younger users age, they would carry forward their higher penetration rates and this trend could mean 23 million subscribers over the next 15 years. Bernstein has a Buy rating for Netflix with a price target of $573. (See NFLX stock analysis on TipRanks)
Rising competition in the streaming space from Amazon Prime Video, Disney+, Apple TV Plus, Hulu and HBO Max is also a major headwind. Disney Plus, which was launched in November 2019, has built a subscriber base of over 60.5 million subscribers in just 8 months.
Meanwhile, Netflix is focusing on expanding its international presence. The company has 193 million paid members across 190 countries, including 70 million in US and Canada. In the first half of 2020, Netflix’s subscribers grew about 10% Y/Y in the US and Canada while the growth was about 39% in Europe, the Middle East, and Africa, 74% in Asia Pacific, and 29% in Latin America.
The Street has a Moderate Buy consensus for Netflix that breaks down into 21 Buys, 10 Holds and 5 Sells. An average price target of $519.43 indicates an upside potential of 4.32% over the next 12-months. The stock has risen 54% so far in 2020.
This image has an empty alt attribute; its file name is NFLX-1.png
Amazon was already an undisputed leader in the e-commerce space. But COVID-19 has further bolstered the company’s position as more customers are shopping online and avoiding visiting physical stores.
The e-commerce giant posted revenue of $88.9 billion in the second quarter, reflecting a Y/Y increase of 40.2%. Online grocery sales tripled while revenue from the company’s cloud computing unit Amazon Web Services surged 29% supported by a rise in remote work and online education.
Amazon’s subscription services revenue, which includes fees from Amazon Prime memberships as well as other services like digital video and music, also grew 29%. Despite over $4 billion in COVID-related costs, the company’s second-quarter EPS grew 97% Y/Y to $10.30.
After establishing its dominance in e-commerce and cloud computing, the company is building its position in streaming services. Amazon’s worldwide streaming video hours doubled Y/Y in Q2 primarily due to Prime Video.
Emphasizing the strength of Amazon Prime Video, Needham analyst Laura Martin states, “Today, Amazon Prime Video is number 2 to Netflix, with about 150mm global Prime subscribers who get Amazon Prime Video for free in the bundle.”
Citing reports by The Diffusion Group, she highlights that 80% of subscribers paid for Prime for free shipping while 20% joined Prime to access other services such as Prime Video, Twitch and music. These other services help Prime Video gain new subscribers and lower the churn rate.
The analyst estimates that Amazon Prime Video’s revenue will grow to $4.1 billion in 2020, up from $3.57 billion in 2019. The five-star analyst has a Buy rating for Amazon with a price target of $3,700. (See AMZN stock analysis on TipRanks)
Amazon stock has already advanced 78% year-to-date and the average price target of $3725.59 indicates further upside potential of about 13%. Barring one analyst with Hold rating, Amazon boasts 38 Buys ratings from the Street, thus adding up to a Strong Buy consensus.
This image has an empty alt attribute; its file name is AMZN-1.png
The bottom line
Netflix is the king in the streaming space while Amazon has a diversified business model with leading positions in several growth areas- including cloud and e-commerce. Also, the Street consensus and upside potential in the stock make Amazon a better pick than Netflix right now despite the fact that shares have already rallied 78% year-to-date.
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
