While Amazon (AMZN -2.18%) and Netflix (NFLX 2.02%) have both played significant roles in developing streaming into what it is today, their overall businesses vary considerably. Netflix derives its revenue almost exclusively from its streaming subscriptions, while Amazon has a diversified model that include such industries as e-commerce, cloud services, digital advertising, and more.
The Nasdaq Composite index is down 26% year to date, and neither Amazon nor Netflix has withstood the dip. Amazon’s stock has fallen 25% and Netflix’s by 63% in the same period. Investors looking to add a streaming stock to their portfolio might wonder which of the two companies will offer higher returns in the long run, so let’s find out.
Netflix: A murky future
Netflix’s stock has taken a deep dive in 2022 as losing 200,000 subscribers in the first quarter sent investors running for the hills. The company has made positive strides since then, forecasting a loss of 2 million subscribers in the second quarter of 2022 but reporting a more moderate loss of a million. With the saturated streaming market filled with more competition than anyone can keep track of, it’s difficult to tell if Netflix will ever fully recover, especially with the growing threat of Walt Disney (DIS -2.27%) at its heels.
In August, Disney announced it had reached 221 million streaming subscribers across its three platforms, surpassing Netflix’s 220.7 million for the first time. Although Disney’s average revenue per user was significantly less than Netflix’s in July, $6.27 per month in the U.S. and Canada versus Netflix’s $15.95, the company’s significant price increases across all of its platforms should close that gap.
Moreover, Netflix moved up the launch of its ad-supported tier from early 2023 to Nov. 1, a month after Disney announced its ad-supported membership for Disney+ would be available on Dec. 8. Netflix seems intent on beating Disney to the punch, as the streaming service could lose subscribers to Disney+’s cheaper service if it debuts first.
While Netflix’s ad-supported service will likely be positive for the company, with some analysts predicting it will generate $8.5 billion in ad revenue by 2025, its future is not guaranteed with the steep competition present. Disney and Netflix must contend with such companies as Warner Bros. Discovery, Comcast, Paramount, and others who offer ad-supported streaming services. Investors might be better off looking at a streaming stock whose revenue is not so dependent on an unpredictable industry.
Amazon: Safety in diversification
Unlike Netflix, Amazon by no means relies on streaming subscriptions as its primary source of revenue. Its streaming service is more of a perk to its lucrative Prime subscription, which includes expedited shipping, e-books, music, gaming, and more. As of 2022, U.S. Prime subscriptions were at 159.8 million — 48% of the country’s population.
Amazon has diversified its earnings to include a wide range of businesses with segments categorized as North America, International, and Amazon Web Services (AWS). The first two mainly comprise revenue from Prime subscriptions and its retail businesses in separate geological locations. AWS is Amazon’s cloud computing business that hosts applications and websites worldwide. As of December 2021, 60% of Amazon’s revenue came from its North American segment, while International provided 27% and AWS 13%.
The e-commerce titan has consistently grown its North American segment, with net sales rising 10% to $74.4 billion in its third quarter. While International sales fell 12%, its AWS segment seemed to work overtime, increasing 33% to $19.7 billion. The company’s cloud computing business has seen exponential growth since it launched in 2006, with AWS responsible for 34% of the $200 billion cloud market — more than any other company. For reference, the company with the second-biggest market share is Microsoft‘s Azure service with 21%.
Which is the better buy?
Taking a look at how Amazon and Netflix’s financial metrics stack up, Netflix has a more attractive P/E and PEG ratio, which suggests it’s the cheaper option; however, Amazon is the less-risky stock in terms of debt.
|P/E ratio (past 12 months)||115.13||19.96|
|PEG ratio (5 yr expected)||4.19||2.06|
Consequently, Amazon’s diverse revenue streams make it a better buy for long-term investors. The company’s growing cloud business and recent investments in healthcare and robotics mean its stock could see significant gains over time.
In recent months, Netflix has made promising moves with popular content, plans to crack down on password sharing, and its coming ad-supported tier. However, the fact remains that nearly all of its revenue comes from streaming subscriptions which can be volatile alongside the market’s steep competition.
As a result, Amazon is the clear choice for investors wanting a safe investment to hold for years to come.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, Netflix, and Walt Disney. The Motley Fool recommends Comcast and Warner Bros. Discovery, Inc. and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
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