Better Stock to Buy Now: Microsoft or Netflix?

Key Points

Two of the biggest stocks on sale right now are Microsoft (NASDAQ: MSFT) and Netflix (NASDAQ: NFLX). Both of these are long-term winners significantly off their highs.

But of the two, which is the better buy right now? Let’s dig in and take a look.

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Netflix just walked away from a massive deal

First, we need to examine why each stock is down.

Netflix’s stock was down big based on its acquisition activity. It had been attempting to buy Warner Bros. Discovery for about $27.75 per share, over $80 billion. However, that deal went up in smoke. Paramount Skydance offered $31 per share to acquire Warner Bros. Discovery, and its board deemed that offer superior to the one Netflix offered, so Netflix walked away from the merger. Following the announcement, Netflix’s stock spiked because this is what was dragging the stock down in the first place.

Microsoft’s tumble is a little less clear. Microsoft has been a leader in the artificial intelligence (AI) competition and has continued to post solid results quarter after quarter. Its last quarter was no exception, yet the stock still tumbled. Now it’s down around 25% from its all-time high. To me, this is mostly the market showing its concerns about the massive AI spending going on and wanting to see a return on investment. However, that doesn’t make any sense for Microsoft.

Microsoft isn’t creating its own generative AI model. Instead, it’s choosing to be an AI facilitator by offering several top models on its cloud computing platform, Azure. So every dollar it spends on capital expenditures is going to supply the computing power necessary for another model to work — an action that has a discernible return on investment because its clients are paying for computing resources.

So with Netflix’s primary reason to be down eliminated and Microsoft being an odd stock to be sold off, which is the better buy?

Microsoft’s stock is cheaper

If we judge these two by what their earnings will look like over their next fiscal year, we can see that Netflix is more expensive than Microsoft.

MSFT PE Ratio (Forward) data by YCharts

This immediately causes me to lean toward Microsoft being a better buy, especially since the growth rates for these two companies are nearly the same.

MSFT Revenue (Quarterly YoY Growth) data by YCharts

However, I could also see a case for Netflix due to the perceived risk of Microsoft’s AI spending.

The stickiness of Netflix has proven to be incredible. No matter what happens, it’s always the one streaming service that viewers seem to return to or never cancel. 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 generative AI is an absolute flop and many of its largest clients fold in the next few years? That would leave Microsoft with a lot of computing power with no use and represent billions of wasted capital expenditures. I think the odds of that happening are low, but it’s a concern that some investors have.

Overall, I think Microsoft is the better buy. However, if you’re concerned about AI spending and don’t believe Microsoft’s approach to it is the best way, I don’t think there’s any problem with investing in Netflix. Prior to the original acquisition announcement, Netflix’s stock traded for nearly $110 per share, so I wouldn’t be surprised if that’s where the stock ends up over the next few weeks as the market digests the news of its ditching the merger. But if the AI buildout lasts for multiple years and Microsoft’s cloud computing business continues to grow alongside it, it has far more upside over the long term.

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Keithen Drury has positions in Microsoft. The Motley Fool has positions in and recommends Microsoft, Netflix, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.