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The past five years have been very good to Netflix, Inc. (NASDAQ: NFLX ) shareholders. There's no denying its stock's success, up 40% on an annualized basis. But as far as growth goes, Amazon.com, Inc. (NASDAQ: AMZN ) is the blue-chip pony to back right now. Even as Amazon stock sits at all-time highs.
Source: Mike Seyfang via Flickr
As business models go, Netflix has a simple one. Buy as much content as humanly possible that your subscribers want to watch. And then grow the subscriber base.
Simple. But not cheap.
The Problem With Netflix Stock
Once upon a time, NFLX was the ultimate pure-play stock that investors loved to own. Then AMZN came along with Amazon Prime, and we had a horse race.
Who's winning that race, I really couldn't tell you. But what I do know is that something's happening at Netflix that should have investors thinking twice about investing in its stock.
I'll give you a hint. The answer's found in the cash flow statement. In 2015, Netflix had negative net cash of $749 million from its operating activities.
Question: When was the last time before 2015 that NFLX used more cash than it provided for its operations?
Answer: Fifteen years ago in 2000, when Netflix generated negative net cash of $23 million from its operating activities. Back then it made sense. NFLX was still relatively new and not making a profit. In fact, it wouldn't start offering video streaming for another seven years.
Anyone who follows Netflix knows content is the thing that keeps the number of competitors to a manageable number - it's just so darn expensive to acquire the stuff. You definitely have to be well-funded to be in the video streaming business.
As long as Netflix has been streaming video, investors have been wondering about its content obligations. Well, they're massive. At the end of the second quarter, they stood at $13.2 billion. A year ago, they were $10.1 billion. That's 31% growth in the past year alone.
Unfortunately, there are two problems with this scenario.
First, Netflix expected to grow subscribers in the second quarter by 2.5 million; that number came in 32% lower at 1.7 million. The second problem is that its subscriber base over the last four quarters has grown 27% to 79.9 million. That seems good until you consider its business model: buy a lot of content that subscribers want to watch and then grow the number of subscribers.
What you really don't want to do for an extended period of time is to grow your content obligations faster than your subscriber base. When that happens, as is the case at the moment, you start experiencing negative net cash from your operating activities.
It's a big reason why NFLX stock has come down below the clouds and under $100. The risks now outweigh the rewards in my opinion.
Why Amazon Stock Looks Superior
The prime reason to own Amazon stock over Netflix is a simple one: cash flow.
Listen, we can argue all day about which underlying business is better, but it's difficult to argue that Amazon doesn't have a good once. AMZN is spreading its tentacles throughout retail in a way we've never seen a company spread its tentacles before. Moreover, it continues to add new types of businesses; Amazon Web Services, once a plucky little cloud offering, now has more worldwide cloud infrastructure services market share than Microsoft Corporation (NASDAQ: MSFT ), International Business Machines Corp. (NYSE: IBM ) and Alphabet Inc (NASDAQ: GOOG , NASDAQ: GOOGL ) combined.
But what you can't argue is just how much better Amazon's cash flow situation is.
In the past five years, AMZN's operating cash flow has grown 264% to $12.7 billion, or about 10% of its annual revenue. Meanwhile, Netflix's has turned negative to the tune of $896 million - a $1.2 billion reversal.
Amazon detractors can talk all day long about the company's lack of profits, but if you compare the two companies' financial statements, there is no comparison.
So, why would you take a risk on Netflix stock when a bet on Amazon stock gives you its Prime video streaming business and so much more?
To me, AMZN is a slam dunk.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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