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Facebook Vs. Netflix: What's The Better Buy In A Market Downturn?

Published 02/08/2018, 04:08 AM
Updated 09/02/2020, 02:05 AM
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Markets don’t move in a straight line. This is a simple concept that should be understand when you become a long-term investor. But the extreme volatility we’re seeing these days is enough to spook many investors, especially those who've grown used to VIX complacency.

In an environment of confusion and fear, some investors forget the actual reason that led them to buy a stock in the first place. Such investors usually sell their best holdings at the first sign of danger, often for no good reason.

The current, ongoing correction, which wiped out about $4 trillion from global markets during the past week, is a manifestation of this herd mentality. And this time, the declines have nothing to do with the fundamentals of the economy and businesses.

So, if this is a blip in your long journey in the world of investing, how should you benefit from the current environment? Smart investors usually buy more of the stuff they like when the prices become more appealing. In the U.S. technology space, I like Facebook (NASDAQ:FB) and Netflix (NASDAQ:NASDAQ:NFLX).

These stocks have had a pretty amazing run during the past year, simply because each has a fantastic business model, something that's hard to replicate. And I don’t see the momentum of either slowing down anytime soon. Here is why:

Facebook

FB Weekly 2016-2018

If your investment philosophy is buy-and-hold, then you shouldn’t even think about selling Facebook stock in this market rout. Facebook is still one of the best growth stories in the tech world despite the recent investor nervousness about the company’s changing tactics on how it is letting users consume news.

Facebook combines some of the best qualities of an internet-era company. Its sales are growing at an impressive double-digit rate; it also has one of the best margins on each dollar earned. As for future growth, it has many untapped avenues, such as WhatsApp.

In the most recent quarter, Facebook sales rose 47% from a year earlier. You don’t see a company of Facebook's size regularly boost sales at this pace. Only a handful of global companies are growing more quickly than Facebook.

Along with expanding sales, Facebook also generated industry-beating profit margins. For each dollar of revenue, it makes $0.46 of operating profit. That's a performance that remains nothing more than a dream for many industry executives.

This impressive Q4 performance occurred despite Facebook's slowing advertising sales growth. But the latest earnings show that Facebook is capable of making up the difference thanks to the power of its platform, for which advertisers are willing to pay higher fees.

During the past five trading days, Facebook stock has shed about 5% of its value. As of yesterday's close it's trading at $180.18.

Still, this is the company which delivered more than 500% gains to shareholders during the past five years, far exceeding broader market returns. I would buy more shares of Facebook on weakness if I have cash sitting on the sidelines.

Netflix

NFLX Weekly 2017-2018

The world’s largest online TV network, Netflix, is another example of a stock worth buying during times of market distress.

The company last month reported its strongest year of subscriber growth to date. The performance was good enough to put Netflix into the fairly exclusive club of $100-billion companies by market cap after shares of the stock, currently trading at $265 after yesterday's close, almost doubled in value during the past year.

The power of the Netflix brand was tested during the recent market meltdown. The results were gratifying for shareholders as well as wannabes. Netflix outperformed many tech giants and remained strong.

In the most recent quarter, Netflix reported a record 8.3 million new subscribers, well above its previous guidance of 6.3 million. But Netflix's growth is not even close to peaking, especially when the company is getting a strong response internationally. Encouraged by the increasing demand for its content, Netflix plans to spend as much as $8 billion on programming this year, and another $2 billion for marketing.

There is no doubt that Netflix will face tough competition from some of the largest global entertainment companies such as Disney (NYSE:DIS), which plans to pour billions of dollars into streaming video content to grab some additional market share. Nevertheless, I see Netflix as well positioned to survive this onslaught.

Netflix has a great competitive advantage, including a valuable trove of user data that it can leverage to further monetize its customer base.

The bottom line: The way I see it, buying stocks is just like becoming a long-term partner in a business you like that you believe will continue growing. Both Facebook and Netflix are great growth stocks which should be kept in your buy-and-hold portfolio.

If you have extra cash on the sidelines it wouldn't be a bad strategy to add both to your positions, if you see some additional pullback in these stocks.

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