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 right now? Read more to learn about our vision…
Netflix, Inc. (NFLX) newly selected Microsoft Corporation (MSFT) like his 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 broader audience and premium connected TV inventory. Thus, all published ads will be available exclusively through the Microsoft platform.
“Microsoft has the proven ability to support them all our advertising needs as we create a new offer with advertising together. Most importantly, Microsoft provided the flexibility to innovate over time in both technology and sales, as well as strong privacy protections for our members,” said NFLX Chief Operating Officer Greg Peters .
“It’s very early and we have a lot of work to do. 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. while we give life to this new service”, he added.
NFLX has gained 31.1% in price over the past month, while MSFT has gained 5.8%. However, NFLX shares are down 62.8% year-to-date compared to MSFT’s 21.3% decline. Also, in terms of last year’s performance, NFLX has declined 56.4% compared to MSFT’s 5.9%. However, which value is better to buy now? Let’s find out.
Recent financial results
NFLX’s revenue rose 1.3% year-over-year to $7.97 billion for the second fiscal quarter of 2022 ending June 30, 2022. However, the company operating income declined 20% from last year’s value to $1.58 billion. Additionally, its net income and earnings per share totaled $1.44 billion and $3.20, down 9.8% and 9.4% year-over-year, respectively.
MSFT’s revenue rose 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% over the period of the previous year to 33.75 billion dollars. Its operating income totaled $20.36 billion, up 19.5% from the previous year.
In addition, MSFT’s net income and earnings per share totaled $16.73 billion and $2.22, registering year-over-year increases of 8.2% and 9.4%, respectively.
Past and expected financial performance
NFLX’s revenue and EBITDA have grown at a CAGR of 20.7% and 47.1%, respectively, over the past three years. However, analysts expect the company’s EPS of $2.15 for the third fiscal quarter of 2022 (ending September 2022) to be down 32.6% from the same period in 2021.
Additionally, the consensus EPS estimate of $10.27 for the current year (ending December 2022) is expected to decline 8.7% year-over-year.
MSFT’s revenue and EBITDA have grown at a CAGR of 16.4% and 22.4%, respectively, over the past three years. Additionally, analysts expect the company’s revenue and EPS to rise 13.5% and 5.6% year-over-year, respectively, in the fourth quarter of fiscal 2022 (ending June 2022).
The company has beaten consensus revenue and EPS estimates in each of the trailing four quarters.
MSFT’s trailing 12-month earnings are 6.21 times that of NFLX. MSFT is also relatively more profitable, with a gross profit margin and EBITDA margin of 68.73% and 49.33% compared to NFLX’s 40.63% and 20.07%, respectively. Additionally, MSFT’s net income margin of 37.63% compares to NFLX’s 16.42%.
Also, 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.
NFLX has an overall C rating, which equates to Neutral in our ownership POWR ratings system In contrast, MSFT has an overall rating of B, which translates to Buy. POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
MSFT is rated B for Sentiment, in line 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 FY2022 EPS to decline 8.7% year-over-year.
Of the 65 stocks of the Internet industry, NFLX is ranked number 20. On the other hand, MSFT is ranked number 12 out of 55 stocks in the Software – Business industry
Beyond what I’ve said above, we’ve also rated the stock for Growth, Value, Stability, Quality and Momentum. Click here to see all the NFLX rankings. Plus, you get all the MSFT grades here.
While NFLX and MSFT are expected to benefit from the newly formed partnership for Netflix’s ad-supported subscription plan, we believe it is better to invest in MSFT now due to its strong financial estimates, revenue growth and earnings and high profitability.
Our research shows that the odds of success increase when investing in stocks with an overall buy or strong buy rating. Check out the top rated internet stocks here. Plus, get access to the top-rated software: Business Actions here.
Shares of NFLX were trading at $220.70 per share late on Friday, down $3.18 (-1.42%). Year to date, NFLX has declined -63.37%, versus a -16.40% increase in the benchmark S&P 500 over 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 his fundamental approach to analyzing stocks, Mangeet seeks to help retail investors understand the underlying factors before making investment decisions.
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