1 to avoid: A growth stock without high growth
Jamie Louko (Netflix): There’s no doubting that Netflix drove the charge of the streaming revolution, and its scale can back that up: The company generated almost $8 billion in Q2 revenue, and the company has amassed more than 220 million paid memberships globally. However, Netflix might not be the best stock to load up on now because of the increasing competition it is facing.
When streaming was in its early stages, Netflix was one of the only games in town. Now, however, it faces competition from nearly all angles: Alphabet’s (GOOG 2.50%) (GOOGL 2.65%) YouTube TV, Disney’s (DIS -0.10%) Hulu, and Disney+ are all formidable rivals to Netflix. In fact, Disney recently overtook Netflix as the largest streaming service, with 221 million subscribers across all its services combined.
This stark increase in competition is taking a toll on Netflix’s financials. In Q2, Netflix saw revenue growth below 9% on a year-over-year basis -- the company’s third-slowest quarterly growth rate in its history as a public company. What’s not slowing, however, are its expenses. The company continues to invest heavily in its content and marketing to reignite its flame, resulting in operating income sinking 15% year over year in Q2. Yet, as seen by its top-line struggles, these investments bear little fruit.
Naturally, shares are trading at a discount of 20 times earnings. That’s much lower than rivals like Disney, which trades at 67 times earnings. However, Netflix doesn’t look like the company it once was, and there are better options among the FAANG stocks. Therefore, you might consider buying one of the more powerful FAANG stocks instead of taking a bet on Netflix, which looks more like a value trap than a bargain buy right now.
