Better Buy: Starbucks vs. Netflix

These industry pioneers both present compelling investment cases.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

Few companies have more of an impact on consumers' daily lives than Starbucks (NASDAQ: SBUX) and Netflix (NASDAQ: NFLX). 

Starbucks built its coffee empire by persuading the general public that drinking its favorite caffeinated beverage should be a premium experience worth paying up for. 

Netflix saw the prominence of the internet as an opportunity to deliver high-quality media content to viewers when and how they want it, at an affordable monthly price. 

They're both great businesses, but investors must weigh some key considerations before deciding which stock to buy.

The case for Starbucks 

Before the coronavirus pandemic significantly altered workers' daily commutes and coffee consumption patterns, Starbucks had been steadily increasing its sales over the past few years. From fiscal year 2016 through fiscal year 2019, total revenue increased at a 7.5% compound annual growth rate, while net income expanded at an 8.5% clip. 

Given the stable nature of its business, Starbucks stock is only up 59% over the last five years, which actually lags the broader S&P 500. What Starbucks lacks in top- and bottom-line growth, however, it makes up for with management's capital allocation policy. In fiscal 2019 alone, Starbucks repurchased more than $10 billion of its shares. This boosts earnings per share, something investors should appreciate. 

The company was hurt by stay-at-home orders implemented earlier this year. As corporate America shifted to a work-from-home model, office workers no longer frequented coffee shops on their way to work. Comparable-store sales declined 14% in fiscal year 2020 compared to the prior year. Starbucks has been demonstrating a recovery in these metrics, though, with fourth-quarter comps down only 3% in China. 

What hasn't seemed to slow down is Starbucks' propensity to open more stores. In the fiscal fourth quarter alone, the company added 480 new locations, bringing its total global store count to 32,660. Its main competitor in China, Luckin Coffee, admitted that it falsified financial records to boost reported sales in 2019, putting Starbucks in prime position to capture market share in this lucrative business. 

The case for Netflix 

As one of the leaders in the battle for our attention, Netflix has made investors rich throughout the years. Over the last decade, its stock is up 19-fold. This is due to impressive subscriber growth, which went from 20 million on Dec. 31, 2010, to 195 million today. 

With most of the world spending more time at home, Netflix benefited tremendously from a coronavirus-related boost during 2020. The company added nearly as many members in the first six months of this year as it did in all of 2019. 

But this remarkable growth has attracted fierce competition, especially from entertainment giant Walt Disney, whose Disney+ streaming service surpassed 73 million paying subscribers in its most recent quarter. This is still a long way off from where Netflix currently stands, but it's a looming threat.  

This industry is not a winner-take-all market, though. Many consumers will pay for multiple services to satisfy their viewing needs. Netflix is aggressively investing in improving its offering to attract viewers, because it must achieve global scale as quickly as possible. Growth has slowed in the U.S., leading to Netflix's intense focus on foreign markets. 

The final verdict 

I've laid out arguments for why both of these businesses warrant investment, and I'm an avid customer of both companies. However, one stock has the edge: Netflix. Even with a $215 billion market capitalization (nearly double that of Starbucks), I am a firm believer that Netflix still has plenty of room to run. 

As a digital-only offering, its business can theoretically serve everyone on the planet with a suitable internet connection. The number of broadband internet subscriptions worldwide continues climbing year after year, supporting Netflix's aspirations. 

Even with a seemingly elevated valuation, I think Netflix is the better buy.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Netflix and Starbucks. The Motley Fool Australia has recommended Netflix and Starbucks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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