Netflix vs Google - Tech Battle

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One company has made some of the most documented blunders in the last several years, but still offers a great service. The other company seems to have its hands in everything from search, to TV, on-line video, mobile handsets, and more. If you are looking at buying a tech stock and you are presented with either Netflix (NASDAQ: NFLX) or Google which one do you choose? This one really isn't a close fight.

Has there ever been a more documented meltdown of a high-flying company before? Maybe there has, but I don't recall one. Netflix managed to make multiple bad decisions and the stock got killed. Since then, Netflix beat earnings but the stock got crushed again because of subscriber losses and forward guidance. I was a stockholder for most of 2011, then I sold. Why did I stop being a stockholder? When Netflix went from saying they would lose money in the first quarter of '12 because of expansion costs to saying they would likely lose money all year. That was it, I sold.

In basic economics you are taught there is a point where you can increase prices before the customer really is bothered by the increase. This is why you see an item you bought a year ago for $2.99 now selling for $3.49. This type of increase is large enough to help the margins of a retailer, but not so large that it will make the customer mad. Netflix management must have missed this concept. A 60% increase in the most popular plan made sure customers would notice the price increase. The whole Qwikster thing - don't even go there.

The positive side of Netflix is their service. I am an avid streaming-only user. I use Netflix on my computer, my iPad, and my PS3. They have a first class experience and the queue system is great. Contrary to what I've read many times, I think their content is actually very good for streaming. Content is not the issue. Competition is not the issue. I've tried Amazon Prime (which has no queue) and it's not even close to as good as Netflix. Hulu Plus? - I'm a subscriber, they are better for current TV episodes then Netflix. If Netflix offered current TV shows the way Hulu Plus does I would drop Hulu in a minute. The issue is we have a stock at nearly $97 a share that isn't expected to earn any money for all of 2012.

The stock is down 68% from its 52 wk high, and Netflix is still expected to grow 20% a year for the next several years. When the highest analysts estimate is $96 a share for 2012, I'm left thinking why would I pay 100 times '12 full year earnings? I might be wrong and this might be an opportunity, but I won't be convinced until they show real growth in both subscribers and earnings. If Netflix met the $96 a share estimate for '12, it would have to sell at 3 times its expected growth rate and still would only be at $58. A 40% discount from current prices is not my idea of a good investment. Love the service, not the stock.

What makes more sense to me? How about Google (NASDAQ: GOOG)? Google is already somewhat in the entertainment business with YouTube and could choose to expand its competition with Netflix in that area. Google of course is in many different businesses which also gives some extra stability that Netflix just can't offer. Google sports the following numbers:

Current Price: $587.20
P/E based on '12 full year earnings: 13.38
Growth expected: 18.59%
PEG: 0.72

So you can buy one of the worlds most recognized brands, get nearly the same growth as Netflix, and Google actually makes money. Google's earnings miss on Thursday gives you a chance to buy into this company at a cheaper price than before earnings. In addition Google's expansion into other countries, and other technologies gives the earnings potential a boost. Google might also be the only company that has the ability to take on the iKingdom (Apple) directly with their purchase of Motorola Mobility. Google now produces both the software (Android) and the hardware. This gives Google an advantage over other handset makers as they control the whole experience. In addition the recent revamp of Google TV might come to fruition before Apple unveils its expected iTV. Given a PEG of 1 Google stock would trade at about $825 a nearly 29% increase from current prices.

Google growing at 18.59%, profitable, and undervalued by at least 29% is choice number one. Netflix growing at 20%, currently losing money, and overvalued by at least 40% is choice number two. Sorry, Netflix. This isn't even a contest.

Motley Fool newsletter services recommend Google and Netflix. The Motley Fool owns shares of Google. MHenage has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. 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.

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