Why is Netflix a FAANG?

I ask why is Netflix a FAANG stock because the other FANGs have far more money.

To clarify the FAANG members are; Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Netflix (NASAQ: NFLX), and Google (NASDAQ: GOOGL). People buy the FAANG stocks because they supposedly make a lot of money.

Yet some FAANGs are richer than others. For instance, Netflix had $4.435 billion in cash and short-term investments on 30 September 2019.

Why Microsoft and not Netflix should be on the FAANG

However, Apple had $100.557 billion in cash and short-term investments, and Alphabet (NASDAQ: GOOG) or Google had $121.177 billion on the same day. Meanwhile, Amazon had $43.401 billion in cash and short-term investments and Facebook had $52.269 billion in cash and short-term investments.

Thus, I conclude Netflix does not belong on the FAANG. I think the FAANG should consist of Facebook, Apple, Amazon, and Google. Unfortunately, that will spell FAAG which is too close a popular insult term for gay people.

Instead, they could add Microsoft (NASDAQ: MSFT) which had $136.636 billion in cash and short-term investments on 30 September 2019. Conversely, Microsoft’s addition will make the acronym FAAMG which does not sound scary. Yet Microsoft is a far better candidate for FAANG membership than Netflix.

Why the FAANG needs Microsoft and not Netflix

Moreover, Mr. Market priced Microsoft reasonably at $155.71 a share on 19 December 2019. Meanwhile Mr. Market paid $332.22 for Netflix on that day.

 Plus Microsoft paid a dividend of 51₵ on 20 November 2019. Microsoft scheduled another quarterly 51₵ dividend for 19 February 2019. Finally, the Microsoft dividend grew from 46₵ to 51₵ in 2019.

In common with three other FAANG stocks; Alphabet, Amazon, and Facebook, Netflix pays no dividend. Apple paid a dividend of 77₵ on 7 November 2019. Thus, adding Microsoft to FAANG could raise the “dividend” to $1.28.   

Importantly, adding Microsoft to FAANG could have lowered its cost from $3,088.57 to $2,192.06 on 19 December 2019 while adding dividend income. For a good estimate of the FAANG cost see Bloomberg’s NYSE FAANG estimate. Dumping a money-losing stock, Mr. Market overprices, and adding dividend income sounds sensible to me.

Netflix is too Small for FAANG

I do not think Netflix belongs on the FAANG because it lacks other FAANG characteristics.

To explain, Alphabet, Amazon, Facebook, and Apple are market dominators. For example, they made 87.96% of the world’s searches with Google in October 2019, Statista estimates. Plus, the Alphabet owned YouTube had two billion users in October 2019, Statista estimates.

Meanwhile, Amazon owned 49.1% of online retail sales in the United States in 2018, eMarketer estimates. Additionally, Amazon Web Services (AWS) owned 47.8% of the cloud services market in 2018, Gartner estimates.

Impressively, Facebook had 2.414 billion active users in October 2019, Statista estimates. Furthermore, another Facebook product; WhatsApp, had 1.6 billion active users in October 2019, Statista estimates, Statista estimates.

Plus, Facebook messenger had 1.1 billion active users in October 2019. Yet another Facebook product; Instagram, had one billion active users in October 2019.

Netflix has too Much Competition

In contrast, Netflix had just 158 million users worldwide in 3rd Quarter 2019, Statista estimates. Hence, Netflix is a small-time operator when you compare it to Alphabet or Facebook.

Meanwhile, Netflix has incredible amounts of competition from YouTube and entertainment companies. Disney (NYSE: DIS); in particular, claims its Disney+ streaming service had over 10 million users during its first week of operation in November 2019, CNET reports. Plus another Disney owned streaming service, Hulu had 28 million subscribers in the United States.

Disney threatens Netflix because it owns movie and TV studios. Currently, Disney owns five movie studios; Disney itself, Marvel, 21st Century Fox, Lucasfilm (Star Wars), and Pixar. Predictably Disney is pulling Marvel and other video content it owns from Netflix. Thus, Netflix could soon lack the world’s most popular movies; such as the Avengers and Star Wars.

In my mind, Disney; which paid an 88₵ dividend on 13 December 2019, is a better candidate for FAANG membership than Netflix. Notably, Disney stock was trading at $146.15 a share on 19 December 2019.

The Threat from Spotify

Beyond, Disney, Netflix must contend with regional streaming services such as Hotstar in India, and Amazon Prime in the United States and elsewhere. Another threat is YouTube, which dominates some areas of video content; such as video podcasts and comedy.

Finally, Spotify (NYSE: SPOT) is a menace to Netflix because it could extend its dominance in audio to video. Spotify has a reputation of being more user friendly than Netflix.

However, Statista estimates Spotify had just 113 million paid subscribers in 3rd Quarter 2019. Yet that number rose from 108 million in 2nd Quarter 2019. Note, I think Spotify is as well qualified as Netflix for FAANG membership. Spotify paid no dividend but traded at $149.68 a share on 19 December 2019.

Does Netflix lose money?

Currently, Netflix makes some money. For instance, Netflix posted a quarterly profit of $2.146 billion on 30 September 2019.

However, Alphabet posted a gross profit of $22.931 billion and Amazon posted a gross profit of $28.679 billion on the same day. Meanwhile, Apple posted a $24.313 billion gross profit; and Facebook posted a $14.497 billion, gross profit in September.

Plus Netflix reported an operating income of $980.24 million and a net income of $665.24 million in contrast to $15.625 billion and $13.686 billion for Apple.

Once again, Netflix is not in the same league as the rest of the FAANG. So I have to ask why is Netflix on the FAANG? My guess is the acronym FAANG sounds cool while the acronym FAAMG sounds dumb.

However, there is a cash rich and dividend paying tech company they could add to FAANG and keep the n. That company is NVIDIA (NASDAQ: NVDA). NVIDIA reported a gross profit of $1.916 billion on 30 September 2019, but it paid a quarterly dividend of 16₵ on 27 November 2019.

Netflix burns cash

Finally, Netflix is still burning a lot of cash. For instance, Netflix reported an ending cash flow of -$568.48 million, and an operating cash flow of -$501.79 million on 30 September 2019.

In contrast, Apple reported an operating cash flow of $19.91 billion and an ending cash flow of -$1.927 billion on the same day. Thus, Apple’s business generates cash while Netflix’s business burns cash.

I conclude Netflix does not belong on the FAANG. In addition, I advise investors to stay away from Netflix because Mr. Market overprices it,. In addition, Netflix pays no dividend, and loses money. However, there are other stocks on the FAANG; including Apple and Alphabet, that investors need to inspect if they want to make money.