Streaming service giant Netflix (NFLX) recently announced a partnership with Microsoft (MSFT) for its new ad-supported subscription offering. While this partnership should bode well for both companies, which of these stocks is a better investment now? Read more to learn our view….
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Netflix, Inc. (NFLX) recently selected Microsoft Corporation (MSFT) as its global advertising technology and sales partner. The company partnered with the tech giant on its new ad-supported subscription offering for consumers. Marketers looking to MSFT for their advertising needs will access Netflix’s wider audience and premium connected TV inventory. So, all ads served will be available exclusively through the Microsoft platform.
“Microsoft has the proven ability to support all our advertising needs as we build a new ad-supported offering together. More importantly, Microsoft offered the flexibility to innovate over time on both the technology and sales side, as well as strong privacy protections for our members,” said NFLX’s COO Greg Peters.
“It’s very early days, and we have much to work through. But our long-term goal is clear: More choice for consumers and a premium, better-than-linear TV brand experience for advertisers. We’re excited to work with Microsoft as we bring this new service to life,” he added.
NFLX has gained 31.1% in price over the past month, while MSFT has gained 5.8%. However, NFLX’s shares have slumped 62.8% year-to-date versus MSFT’s 21.3% decline. Moreover, in terms of the past year’s performance, NFLX has declined 56.4% compared to MSFT’s 5.9%. However, which stock is a better buy now? Let’s find out.
Recent Financials Results
NFLX’s revenue increased 1.3% year-over-year to $7.97 billion for the fiscal 2022 second quarter ended June 30, 2022. However, the company’s operating income declined 20% from the year-ago value to $1.58 billion. In addition, its net income and earnings per share came in at $1.44 billion and $3.20, down 9.8% and 9.4% year-over-year, respectively.
MSFT’s revenue increased 18.4% year-over-year to $49.36 billion for the fiscal 2022 third quarter ended March 31, 2022. The company’s gross margin grew 17.7% from the prior-year period to $33.75 billion. Its operating income amounted to $20.36 billion, up 19.5% year-over-year.
Also, MSFT’s net income and earnings per share came in at $16.73 billion and $2.22, registering increases of 8.2% and 9.4% year-over-year, respectively.
Past and Expected Financial Performance
NFLX’s revenue and EBITDA have grown at CAGRs of 20.7% and 47.1%, respectively, over the past three years. However, analysts expect the company’s EPS of $2.15 for the fiscal 2022 third quarter (ending September 2022) to decline 32.6% from the same period in 2021.
Furthermore, the $10.27 consensus EPS estimate for the current year (ending December 2022) is expected to decline 8.7% year-over-year.
MSFT’s revenue and EBITDA have grown at CAGRs of 16.4% and 22.4%, respectively, over the past three years. Moreover, analysts expect the company’s revenue and EPS to increase 13.5% and 5.6% year-over-year, respectively, in the fiscal 2022 fourth quarter (ended June 2022).
The company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.
Profitability
MSFT’s trailing-12-month revenue is 6.21 times what NFLX generates. MSFT is also relatively more profitable, with gross profit margin and EBITDA margin of 68.73% and 49.33% compared to NFLX’s 40.63% and 20.07%, respectively. Also, MSFT’s net income margin of 37.63% compares to NFLX’s 16.42%.
Furthermore, MSFT’s ROE, ROA, and ROTC of 48.72%, 15.67%, and 22.43% are higher than NFLX’s 30.93%, 8.50%, and 10.97%, respectively.
POWR Ratings
NFLX has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. In contrast, MSFT has an overall rating of B, which translates to Buy. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
MSFT has a B grade for Sentiment, consistent with the company’s favorable revenue and earnings growth estimates. NFLX, on the other hand, has a Sentiment grade of C. This is justified as analysts expect the company’s EPS for fiscal 2022 to decline 8.7% year-over-year.
Of the 65 stocks in the Internet industry, NFLX is ranked #20. On the other hand, MSFT is ranked #12 of 55 stocks in the Software – Business industry.
Beyond what I’ve stated above, we have also rated the stocks for Growth, Value, Stability, Quality, and Momentum. Click here to view all the NFLX ratings. Also, get all the MSFT ratings here.
The Winner
While NFLX and MSFT are expected to benefit from the newly formed partnership for Netflix’s ad-supported subscription plan, we think it is better to invest in MSFT now because of its robust financials, revenue and earnings growth estimates, and high profitability.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View the top-rated Internet stocks here. Also, access the top-rated Software – Business stocks here.
NFLX shares were trading at $220.70 per share on Friday afternoon, down $3.18 (-1.42%). Year-to-date, NFLX has declined -63.37%, versus a -16.40% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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