They take different approaches, but one company will likely stand out for investors.
The news that Alphabet‘s (GOOGL -1.76%) (GOOG -1.84%) YouTube claimed the largest share of TV viewership in May may seem difficult to comprehend. While traditional TV has declined for some time, many might assume that a streaming site like Netflix (NFLX -1.38%) would win over the most viewers.
Despite this victory, it may leave investors confused as to which streaming service stock might serve them better. Do they stick with the longtime streaming giant Netflix, or do they try to capitalize on YouTube’s variety and the Google parent’s digital advertising dominance?
Alphabet vs. Netflix
In a technical sense, Netflix is the more straightforward “streaming stock” choice, as it relies primarily on that medium. It has held a first-mover advantage by pioneering the industry and progressively adding content and options as competitors emerged.
Still, holding that advantage is a costly endeavor that has included strategies such as spending billions on proprietary content and abandoning its long-held opposition to ad-supported media. Despite such struggles, Netflix’s revenue in the first quarter of 2024 grew 15% to $9.4 billion, with most of that increase coming through rising membership and pricing.
In contrast, Alphabet is a conglomerate that earns revenue from advertising, cloud-related services, and numerous other businesses. Aside from a brief experiment with proprietary content several years ago, YouTube has typically served as a platform for user-created content. Also, as a pioneer in digital advertising, it has long derived the majority of its revenue from such ads.
However, the $8 billion in YouTube-related revenue earned in the first quarter of 2024 pales in comparison to the $46 billion in ad revenue from Google searches during the same period.
Moreover, Google parent Alphabet owns countless businesses and has gradually tried to diversify its income streams away from advertising. Despite such efforts, advertising made up 77% of Alphabet’s nearly $81 billion in revenue in the first quarter of 2024. Like with Netflix, overall revenue grew 15% year over year.
How the metrics of both companies compare
Nonetheless, Alphabet’s larger size led to a higher free cash flow. During Q1, it generated about $17 billion in free cash flow, about 21% of its revenue. Numerically, this was well above the $2.1 billion in free cash flow for Netflix, though Netflix’s free cash flow was about 22% of its revenue.
Not surprisingly, an improved performance for Netflix may have influenced its stock, which is up around 65% over the last year compared with just over 55% for Alphabet.
However, over the last five years, Alphabet has dramatically outperformed Netflix. That came at a time when Netflix’s competitors made strides against the streaming leader. Now, amid its new, ad-supported option, its double-digit revenue growth has returned.
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Also, Netflix’s improvement in recent quarters comes at a premium. It currently trades at a 48 P/E ratio. Although that is not a high level for Netflix historically, it has a significantly higher multiple than Alphabet, a stock that trades at 28 times earnings. Thus, Netflix’s slightly stronger performance recently comes at a substantially higher cost.
Alphabet or Netflix?
Under current conditions, investors are likely better off choosing Alphabet. Since YouTube is a relatively smaller part of the company, it is arguably misleading to call the Google parent a “streaming stock.”
Nonetheless, Alphabet’s ability to draw advertising revenue strongly positions the company as the streaming industry relies more heavily on ad-supported content. Additionally, YouTube attracts its content at no cost, likely meaning its streaming business operates at a lower relative cost than Netflix’s.
Finally, Alphabet attracts nearly as much free cash flow on a percentage basis as Netflix. Since Alphabet offers a more diversified business and a much lower valuation, investors will likely be better served by the Google parent over time.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Netflix. The Motley Fool has a disclosure policy.
