Which FAANG Stock is a Better 'Buy the Dip' Candidate: Netflix vs. Microsoft

Tech giant Microsoft Corporation (MSFT) develops, licenses, and supports software, services, devices, and solutions worldwide. Its offerings range from Microsoft Teams, Office 365 Security, and Compliance to Xbox hardware and Xbox content and services in the gaming segment. On the other hand, Netflix, Inc. (NFLX) provides entertainment services. It offers TV series, documentaries, and feature films across various genres and languages. The company provides members the ability to receive streaming content through a host of Internet-connected devices.

While the tech companies are facing severe selling pressure to begin the year as yields climb, it could be wise to consider FAANG stocks given their stable nature. Even though rising inflation and the expected hike in interest rates could affect the technology industry’s expansion, increasing demand for advanced technologies amid the accelerating digital transformation should drive its growth. According to GoRemotely, the U.S. tech industry is expected to reach a market value of $5 trillion by the end of 2021. Therefore, both MSFT and NFLX should benefit.

MSFT has gained 45.6% over the past year, while NFLX has returned 5%. Also, MSFT’s 9.8% gains over the past six months compare to NFLX’s negative returns. Moreover, MSFT is the clear winner with 21.4% gains versus NFLX’s negative returns in terms of the past nine months’ performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On November 12, 2021, MSFT and Kyndryl announced a landmark global strategic partnership that will combine their market-leading capabilities in the service of enterprise customers. The deal leverages Microsoft Cloud, and MSFT becomes Kyndryl's only Premier Global Alliance Partner, increasing its access to the $500 billion managed services market where Kyndryl leads.

On November 22, 2021, NFLX announced plans to acquire Scanline VFX, one of the world's most creative and innovative VFX studios. This will ensure that NFLX’s creators have access to the world's most innovative tech and continue to bring the most compelling and cutting-edge storytelling to their members.

Recent Financial Results

MSFT’s total revenue increased 22% year-over-year to $45.30 billion for the fiscal first quarter ended September 30, 2021. The company’s income from operations grew 27% year-over-year to $20.20 billion, while its non-GAAP net income came in at $17.20 billion representing a 24% year-over-year increase. Also, its non-GAAP EPS came in at $2.27, up 25% year-over-year.

NFLX’s total revenue increased 16.3% year-over-year to $7.48 billion for the fiscal third quarter ended September 30, 2021. The company’s operating income grew 33.5% year-over-year to $1.76 billion, while its net income came in at $1.45 billion representing an 83.4% year-over-year increase. Also, its EPS came in at $3.19, up 83.3% year-over-year.

Past and Expected Financial Performance

MSFT’s revenue and EPS grew at CAGRs of 15.3% and 54.4%, respectively, over the past three years. Analysts expect MSFT’s revenue to increase 15.6% for the quarter ending March 31, 2022, and 14.2% next year. The company’s EPS is expected to grow 6.9% for the quarter ending March 31, 2022, and 14.4% next year. Moreover, its EPS is expected to grow at 16.5% per annum over the next five years.

On the other hand, NFLX’s revenue and EPS grew at CAGRs of 24.3% and 58.2%, respectively, over the past three years. The company’s revenue is expected to increase 12.7% for the quarter ending March 31, 2022, and 14.4% next year. Its EPS is expected to decline 8% for the quarter ending March 31, 2022, but grow 21.1% next year. Also, NFLX’s EPS is expected to grow at 42.2% per annum over the next five years.

Profitability

MSFT’s trailing-12-month revenue is 6.16 times what NFLX generates. MSFT is also relatively more profitable with a gross profit margin and net income margin of 68.86% and 38.51% compared to NFLX’s 43.22% and 17.64%, respectively

Furthermore, MSFT’s ROE, ROA, and ROTC of 49.30%, 14.59%, and 21.22% are higher than NFLX’s 39.39%, 10.01%, and 13.18%, respectively.

Valuation

In terms of forward non-GAAP P/E, NFLX is currently trading at 49.09x, 45.8% higher than MSFT’s 33.66x. Moreover, NFLX’s forward EV/EBITDA ratio of 36.16x is 53.9% higher than MSFT’s 23.50x.

So, MSFT is relatively affordable here.

POWR Ratings

MSFT has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, NFLX has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

MSFT has a B grade for Sentiment, consistent with analysts’ expectations that its EPS will increase in the upcoming months. In contrast, NFLX has a C grade for Sentiment, in sync with analysts’ expectations that its EPS will decline in the near term.

Of the 166 stocks in the Software - Application industry, MSFT is ranked #16. However, NFLX is ranked #27 of 77 stocks in the Internet industry.

Beyond what I’ve stated above, we have also rated the stocks for Growth, Quality, Value, Stability, and Momentum. Click here to view all the MSFT ratings. Also, get all the NFLX ratings here.

The Winner

The FAANG stocks are expected to grow steadily amid rising consumer demand for tech products and services. While both MSFT and NFLX are expected to gain, it is better to bet on MSFT because of its lower valuation, higher profitability, and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Software - Application industry here. Also, click here to access all the top-rated stocks in the Internet industry.

MSFT shares were trading at $303.28 per share on Tuesday afternoon, down $6.92 (-2.23%). Year-to-date, MSFT has declined -9.82%, versus a -3.80% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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