Better buy: Netflix vs. Twitter

Which volatile stock has a brighter future?

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

Twitter (NYSE: TWTR) and Netflix (NASDAQ: NFLX) recently became two of the market's most talked-about tech stocks.

Twitter's stock went on a wild ride after Elon Musk launched a hostile takeover bid for the company on April 14. The $43 billion bid, which values Twitter at $54.60 per share, came after Musk already bought 9.2% of the company but declined to take a seat on its board of directors.

Netflix's stock sank to its lowest levels in over four years after the company released its dismal first-quarter earnings report on April 19. The streaming media giant lost 200,000 subscribers, marking its first sequential decline since 2011, and predicted it would lose another two million subscribers in the second quarter.

Should investors who can stomach the near-term volatility consider buying either of these divisive stocks right now? 

What happened to Twitter?

Despite being widely used by news outlets, public figures, and brands, Twitter's active user base remains small relative to its cultural influence. Its monetizable daily active users (mDAUs) rose 13% to 217 million in 2021, but it's still smaller than Snap's Snapchat, which ended last year with 319 million DAUs.

Last February, Twitter claimed it could reach 315 million mDAUs by the end of 2023, which implies its year-over-year growth will accelerate to more than 20% over the following two years. It also claimed it would more than double its annual revenue from $3.7 billion in 2020 to $7.5 billion in 2023 by gaining new users, selling higher-value ads, and launching new products.

But a mere nine months after setting those ambitious goals, then CEO Jack Dorsey resigned and was succeeded by controversial CTO Parag Agrawal, who previously declared Twitter should "focus less on thinking about free speech" in a 2018 interview. Under Agrawal, Twitter quickly banned more controversial accounts and ramped up its spending on new features.

Analysts expect Twitter's revenue to rise 18% this year, but for its earnings to remain in the red as it increases its headcount by 20%. Twitter's messy outlook, its mediocre long-term returns, and Agrawal's views likely all brought Musk -- a vocal critic of Twitter's censorship policies -- to the table.

Twitter recently adopted a poison pill plan to fend off the takeover bid, but Musk could still team up with other investors or launch a tender offer to directly buy more shares from its existing investors. It's unclear how this ongoing drama will end, but Twitter's current price of $46 suggests the market isn't too optimistic about Musk closing the deal at $54.60 a share.

What happened to Netflix?

Netflix is still the largest paid streaming video platform in the world with 221.6 million paid subscribers. But over the past few years, well-funded competitors like Disney, Amazon, Apple, and Warner Bros. Discovery carved up the market. 

Newer ad-supported challengers like the Roku Channel and Comcast's Peacock also provide free alternatives to Netflix and other premium platforms. The saturation of this market throttled Netflix's growth.

Netflix was initially dismissive of these threats, but it started to cite competition as a major headwind over the past two quarters. Co-CEO Reed Hastings also said Netflix would finally develop a new tier for "ad-tolerant" viewers during its latest conference call, which reversed his previous opposition to adding any advertisements to the platform. That change of heart suggests that Netflix is running out of ways to gain new viewers.

Netflix also blamed its slowdown on users sharing their passwords to an additional 100 million households worldwide. COO Gregory Peters said Netflix would start asking members to "pay a bit more to share the service with folks outside their home" to monetize those viewers -- but that jarring change could also alienate its core audience. 

Netflix's abrupt slowdown and seemingly desperate changes prompted Pershing Square's Bill Ackman, who took a $1.1 billion stake in Netflix after its previous post-earnings plunge in late January, to liquidate his firm's entire position for a loss of more than $400 million.

Analysts expect Netflix's revenue to rise 9% this year as its rising content costs reduce its net income by 3%. Its business isn't doomed yet, but its high-growth days certainly seem to be over.

Is either stock worth buying?

Twitter trades at more than 50 times its adjusted earnings estimate for 2022, which excludes its big stock-based compensation expenses. For reference, Meta Platforms trades at just 16 times forward earnings following its massive pullback over the past several months.

Netflix trades at 20 times forward earnings, but that's still not a low valuation for a company with slowing growth and rising costs. If Netflix traded at multiples similar to those of more diversified media companies like WBD or Paramount, its stock could still be cut in half.

I'm not a fan of either stock right now. But if I had to pick one over the other, I'd stick with Twitter because it's merely treading water instead of sinking. The recent takeover interest in the company, while chaotic, also indicates it has more near-term upside potential than Netflix in this challenging market. 

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

Leo Sun owns Amazon, Apple, Meta Platforms, Inc., Walt Disney, and Warner Bros. Discovery, Inc. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Amazon, Apple, Meta Platforms, Inc., Netflix, Roku, Twitter, and Walt Disney. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Comcast and has recommended the following options: long January 2024 $145 calls on Walt Disney, long March 2023 $120 calls on Apple, short January 2024 $155 calls on Walt Disney, and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Amazon, Apple, Meta Platforms, Inc., Netflix, and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 

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