These are the two biggest stocks currently on sale Microsoft(NASDAQ: MSFT ) and Netflix(NASDAQ: NFLX ). Both of these are long-term winners significantly above their highs.
But of the two, which is the better buy? Let’s take a look and see.
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First, we need to examine why each stock is down.
Netflix’s stock was down big based on its acquisition activity. He was trying to buy it Warner Bros. Discovery For about $27.75 per share, more than $80 billion. However, the deal went up in smoke. Paramount Skydance Warner Bros. Discovery offered $31 per share to acquire, and its board said it offered better than Netflix’s offer, so Netflix walked away from the merger. Following the announcement, Netflix stock soared because that’s what drove the stock down in the first place.
Microsoft’s Tumbler is a little less clear. Microsoft has remained a leader in the artificial intelligence (AI) race and continued to post strong results in the quarter. Its last quarter was no exception, but the stock still fell. Now it is down about 25% from its all-time high. To me, it’s mostly the market that shows its concerns about the big costs of AI and wants to see a return on investment. However, this does not mean anything to Microsoft.
Microsoft doesn’t build its own generative AI model. Instead, it chooses to be an AI facilitator by offering several excellent models on its cloud computing platform, Azure. So every dollar it spends on capital expenditures is required for computing power to make another model work—a practice that has a significant return on investment as customers pay for the computing resources.
So eliminating the primary argument that Netflix and Microsoft are odd stocks to sell, which is the better buy?
If we judge these two by how their earnings will look in their next fiscal year, we can see that Netflix is more expensive than Microsoft.
MSFT PE Ratio (Forward) data by YCharts
This immediately leads me to lean towards Microsoft as a better buy, especially since the growth rates of these two companies are almost the same.
MSFT Revenue (Quarterly YoY Growth) data by YCharts
However, I can also see a case for Netflix because of the potential risk of Microsoft’s AI spending.
Netflix’s stickiness has proven to be incredible. No matter what happens, it’s always a streaming service that keeps viewers coming back or never canceling. This bodes well for long-term viability.
Microsoft is also an incredibly sticky company, as its software has powered businesses for years, but what happens if productive AI is an absolute flop and shuts down many of its biggest customers in the next few years? This would leave Microsoft with a lot of computing power unused and represent billions in wasted capital expenditures. I think the chances of this happening are low, but it is a concern that some investors have.
Overall, I think Microsoft is the best buy. However, if you are worried about the costs of AI and don’t believe that Microsoft’s approach is the best way to go about it, I don’t think there is any problem with investing in Netflix. Prior to the original acquisition announcement, Netflix stock was trading for nearly $110 per share, so I wouldn’t be surprised if the stock bottoms out in the next few weeks as the market digests the news of this merger. But if the AI build continues for a few years and Microsoft’s cloud computing business grows alongside it, it has a lot going for it in the long run.
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Keith Drury holds positions at Microsoft. Motley Fool on Microsoft, Netflix, and Warner Bros. Discovery has and offers positions. Motley Fool has a disclosure policy.
Best Stock to Buy Now: Microsoft or Netflix? Originally published by Motley Fool
