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After a pivotal year for steaming, where increased competition led an industry leader to lose its dominating position, 2023 will likely be another crucial year. The rise in demand for ad-supported tiers and the introduction of live sports on various platforms have added another facet to the industry and could give some companies an advantage.
Amazon (AMZN -2.99%) and Netflix (NFLX -0.89%) are some of the streaming industry’s oldest players, yet each have watched their stocks plummet roughly 50% in 2022. As a result, there’s a potential opportunity to land a bargain if you’re willing to hold for the long term.
So, let’s take a look at which company is the better buy this January.
Macroeconomic headwinds over the last year have hit Amazon particularly hard, with its e-commerce business experiencing sharp profit declines. In the third quarter of 2022, revenue in the company’s North American segment grew 20% year over year to $78.8 billion, while operating income came to a loss of $412 million. Similarly, Amazon’s international segment saw revenue decline 4.8%, leading to operating losses of $2.4 billion.
Despite e-commerce losses, the company’s Prime subscription, which includes services such as expedited shipping and its streaming platform Prime Video, had revenue grow 9.1% to $8.9 billion. Amazon’s Prime Video is unique to the steaming industry, as it is included in the Prime membership along with many other services, making subscribers less likely to drop the service in favor of another entertainment platform.
As a result, the company has grown its global subscriber count to over 200 million, granting Amazon a 19% market share in streaming as of Q3 2022, second only to Netflix.
Over the last year, Amazon has worked to grow its market share by acquiring MGM, which is the home of film franchises such as James Bond and Rocky, for $8.5 billion. It also entered a lucrative partnership with the NFL to exclusively broadcast Thursday Night Football on Prime Video.
While Amazon made positive strides in streaming in 2022, the most attractive part of its business is its cloud computing platform, Amazon Web Services (AWS). In Q3 2022, the cloud service provided 100% of Amazon’s operating income, hitting $5.4 billion, with revenue rising 27% year over year to $20.5 billion.
The last year has proven the streaming industry is in a state of flux, making it volatile as a result. However, Amazon’s diverse business has shown it has the strength to overcome market fluctuations, with AWS making up for e-commerce losses in 2022.
After years as the streaming king and almost single-handedly founding the industry in 2007, Netflix experienced a shake-up to its throne in 2022. In the first half of the year, the company reported its first subscriber losses in over a decade by losing over 1 million members in the first two quarters. Q3 2022 brought a return to subscriber growth by adding 2.4 million new members, totaling 223.09 million.
However, Netflix has failed to beat Disney‘s total streaming subscribers for two straight quarters, with the House of Mouse reporting 235.7 million members in Q3 2022.
Netflix has responded to increased competition by working to diversify its business. Prior to last year, nearly all the company’s revenue was reliant on streaming subscribers. However, the launch of an ad-supported tier this past November has seen the company enter the lucrative digital advertising industry. This new year will allow time for Netflix to fine-tune its ad offerings and grow its advertising earnings.
Moreover, the streaming giant launched Netflix Games in November 2021, a separate library of mobile games available to Netflix subscribers. The company has used the last year to expand its gaming division by acquiring more developers and has revealed a keen interest in cloud gaming. Netflix has also begun forming relationships with some of the industry’s biggest studios by creating film/TV adaptions of popular games and mobile versions of existing franchises.
It’s still early days for Netflix’s restructured business, with time being the determining factor in its success. However, the moves it has made are favorable for its long-term growth.
Amazon and Netflix had a challenging 2022 and have gone into the new year with a lot of work ahead of them. As a result, alternative streaming stocks such as Apple and Disney are more attractive investment options. However, if you’re dead set on adding one of these stocks to your portfolio, the better buy is Amazon.
An investment in Amazon will likely need to be held for the very long term, as the company will require time for economic declines to subside before its e-commerce business can return to profitability. However, AWS’s leading market share of 34% in a burgeoning industry like cloud computing makes the company more diverse than Netflix and feels more reliable for the long haul.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com, Apple, Netflix, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney, long March 2023 $120 calls on Apple, short January 2024 $155 calls on Walt Disney, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
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