Better Buy: Starbucks vs. Netflix

Coffee chain Starbucks (NASDAQ:SBUX) and video-streaming veteran Netflix (NASDAQ:NFLX) have made a lot of money for their investors over the years. If you invested $10,000 in Starbucks a decade ago and reinvested your dividends along the way, that position would be worth more than $71,000 today. The same investment in Netflix works out to a total return of $180,000, with no help from dividend payouts. These are market-stomping gains, and some would call them life-changing.

NFLX Total Return Level Chart

NFLX Total Return Level data by YCharts

But all of that is in the rearview mirror. The more pressing question for investors today is which stock will deliver the best returns from their current prices and market positions. Should you buy Netflix of Starbucks right now? Let’s have a look.

Hot coffee

Starbucks is trading at freshly roasted all-time highs right now. The stock has gained 23% since the start of 2020, roughly in line with the broader market. Foot traffic to Starbucks’ stores has not recovered to pre-coronavirus levels but the average Starbucks customer is buying more coffee per trip. All told, first-quarter revenues fell just 5% year over year — a solid recovery from the 38% plunge in the third quarter of 2020.

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“A big reason for the increase in ticket is group ordering and certainly, as we have Grab and Go and customers are looking for safe, familiar convenient experiences, customers are coming in and they are purchasing multiple beverages, multiple food items for larger groups than in the past, which is why traffic is down and ticket is up,” said CEO Kevin Johnson in January’s first-quarter earnings call.

In Johnson’s view, there’s a good chance that Starbucks fans have gotten used to larger orders and more premium coffee variations during the pandemic and may carry some of these habits over as the world goes back to normal shopping habits and in-store traffic patterns.

This is an obvious winner as the American economy climbs back from the COVID-19 crisis over the next couple of years. At the same time, Starbucks is itching to expand its business outside American borders. China is the company’s fastest-growing market at the moment, driven by social media buzz and strong mobile orders.

Netflix and thrills

Netflix turned an important corner at the end of 2020. The company has been financing its content production efforts by raising $16 billion of debt over the last five years. In the fourth quarter of 2020, CEO Reed Hastings said that the company shouldn’t need to add any more debt and will start paying it down instead within the next couple of years. Ergo, Netflix’s cash-burning content production has pulled in enough global subscribers to make the business pull its own weight. Beyond that tipping point, Netflix will become a massive cash machine whose growth-driving fuel — original content — was paid for in debt-backed cash.

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The coronavirus crisis accelerated Netflix’s subscriber and revenue growth in 2020 but the long-term business plan didn’t change. The streaming video market has only just begun to replace linear television around the world and Netflix is in pole position to grab a dominant share of the global entertainment market.

“In a few decades, linear TV will be the fixed-line telephone: no longer mainstream,” says Netflix’s official long-term business plan. “Streaming entertainment will replace linear TV, and we hope to keep leading by offering an amazing entertainment experience.”

An elderly businessman arm-wrestling with a younger peer.

Image source: Getty Images.

Who’s the winner?

Starbucks is a direct bet on the post-coronavirus economy, supported by international growth and a premium brand. Netflix will see slower growth in a normalized world but the international growth story is much further along and the company is getting closer to delivering a sustainable stream of positive free cash flows. It’s hard to go wrong with either Netflix or Starbucks, because both companies are exploring massive global growth markets. Owning both makes a lot of sense.

But if I have to choose just one of these stocks, I’m reaching for Netflix before Starbucks any day of the week. In the end, I expect the video-streaming market to dwarf the global sales of premium coffee. Furthermore, I can’t come up with a more forward-thinking business leader on the planet than Reed Hastings. If you’re buying both stocks, I would recommend putting more money into Netflix than Starbucks.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


View more information: https://www.fool.com/investing/2021/03/16/better-buy-starbucks-vs-netflix/

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