The recent revelation that Alphabet’s YouTube dominated TV viewership in May may be a head-scratcher for many. With the decline of traditional TV, one would expect a streaming powerhouse like Netflix to reign supreme. However, this victory has left investors pondering which streaming service stock holds more promise. Stick with the established giant Netflix, or delve into YouTube’s diversity and the digital ad dominance of Google’s parent company?
The Streaming Titans: Alphabet vs. Netflix
From a technical standpoint, Netflix appears as the more straightforward choice in the realm of streaming stocks, focused primarily on that medium. It has seized a first-mover advantage, paving the way in the industry and continually expanding its content offerings amid rising competition.
Yet, maintaining this advantage comes with a hefty price tag, involving massive investments in original content and a pivot towards ad-supported media. Despite these challenges, Netflix’s revenue surged by 15% to $9.4 billion in the first quarter of 2024, driven chiefly by growing memberships and pricing.
Meanwhile, Alphabet operates as a conglomerate, drawing revenue from advertising, cloud services, and various other ventures. YouTube, apart from a brief stint in proprietary content, traditionally serves as a platform for user-generated material. Notably, as an advertising pioneer, Google has long relied on ad revenue for the bulk of its earnings.
However, the $8 billion YouTube revenue in Q1 2024 pales next to the $46 billion from Google search ads during the same period. Despite Alphabet’s efforts to diversify away from advertising, it still accounted for 77% of the nearly $81 billion in revenue for the conglomerate. Similar to Netflix, Alphabet saw a 15% year-over-year revenue growth.
Comparing Key Metrics
Despite its smaller free cash flow, Netflix stood out with a cash flow 22% of its revenue, compared to Alphabet’s 21% in Q1. Notably, Netflix stock surged around 65% in the past year, outpacing Alphabet’s 55% growth.
Over the last five years, Alphabet has significantly outperformed Netflix, despite rising competition in the streaming space. As Netflix introduces ad-supported options, its double-digit revenue growth has made a comeback.
In terms of valuation, Netflix trades at a P/E ratio of 48, notably higher than Alphabet, which trades at 28 times earnings. This premium for Netflix suggests stronger recent performance but at a steeper cost.
The Better Bet: Alphabet or Netflix?
Presently, opting for Alphabet seems a wiser move. While YouTube is a minor entity within Alphabet, dubbing the tech giant a “streaming stock” could be misleading.
Alphabet’s stronghold on ad revenue positions it well in an industry gravitating towards ad-supported content. Moreover, YouTube attracts content creators at no cost, potentially operating at a lower expense compared to Netflix.
With comparable free cash flow percentages and a more diversified business model plus lower valuation, Alphabet appears to be the smarter long-term investment over Netflix.
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