Those of you looking for some hot stocks to bet on need not look any farther than Netflix (NFLX) and TripAdvisor (TRIP), up 30% and 20% respectively in the past month alone.
Up until May, neither company exhibited the kind of momentum you look for in hot stocks. However, in the last few weeks, both NFLX stock and TRIP stock have come alive and now sit comfortably ahead of the S&P 500 through the first five months of 2014.
Which one of these hot stocks should you own? I’ll look at the various reasons one might consider NFLX stock over TRIP stock and vice-versa.
Hot Stocks — Why Netflix?
Since hitting its two-year low of $53.87 on August 2, 2012, NFLX stock is up an astounding 676% compared to 46% for the SPDR S&P 500 (SPY). At no time has it been hotter than this past May when it had just four down days out of 21. That’s the kind of performance you expect from hot stocks, but it has led many market experts to question the sustainability of this latest run-up in Netflix.
Considered by many to be overbought at the moment, NFLX stock might still be worth buying now, rather than hoping for another price retreat like we saw in April.
New Shows: Orange is the New Black’s second season comes out June 6. In early May, Netflix announced that it had given the green light for a third season, making it one of the video streaming services’ most popular shows. Anyone who has been considering a new Netflix subscription might be enticed if the early reviews for this season are as positive as they were in the first season.
Price Increase: Current subscribers (I’m one of them) have been given a two-year reprieve from the $1 increase in the monthly subscription rate that took effect in May. RBC Capital Markets analyst Mark Mahaney believes very few current Netflix subscribers are going to cancel their memberships as a result of the price increase. And why would you if it doesn’t take effect for two years? By then, there’s no telling how many original programs Netflix will have created that are as interesting as Orange is the New Black and House of Cards. Strong businesses have pricing power, and NFLX is no exception.
International Expansion: Netflix currently has 12.7 million subscribers outside the U.S. in more than 40 countries including Canada and the U.K. Its international revenue accounts for 25% of its total streaming revenue, and that number’s expected to surpass U.S. revenue sometime in the not-too-distant future. With its service launching in six European countries later in 2014, NFLX expects to achieve profitability in its international unit by the end of the year. While content costs are rising, a profitable international business certainly makes its business model that much more attractive.
If NFLX stock wants to remain in “hot stocks” territory it’s going to have to continue to execute well on points one and three in 2014 and beyond. If it can do that, there’s a good chance that point 2 will take care of itself lifting Netflix stock beyond $500.
As for the competition…
Hot Stocks – Why TripAdvisor?
As hot stocks go, TripAdvisor hasn’t been any slouch — up 168% since August 2, 2012. While well short of Netflix’s total return over the 22-month period, it still managed to beat the SPY by almost 300%. It’s definitely not what you’d call a value stock.
Nonetheless, I think you have to consider TRIP stock relative to NFLX. In this regard, I think you’ll find that TripAdvisor could be the better buy. Here’s why:
Operating Margins: TripAdvisor’s operating margin in the trailing twelve months is 30.6%, almost 25 percentage points higher than Netflix. The two companies have almost identical EBITDA, despite Netflix having almost four times the revenue. TripAdvisor doesn’t have to work nearly as hard to turn a profit, which comes in handy during difficult economic conditions. While TRIP stock has only traded since December 2011 when it was spun off from Expedia (EXPE) and hasn’t experienced a recession year like 2008, I believe investors will find that TRIP stock holds up much better than NFLX thanks in part to better margins.
Vacation Rentals: My brother recently attended my niece’s graduation from Indiana University. Staying in Indianapolis, he couldn’t believe that a downtown hotel in a smallish Midwest city could fetch $305 per night (parking included). My response? Get used to it. Hotel prices are on the rise; as a result, travelers are looking for ways to save money while still providing a comfortable, enjoyable vacation. TripAdvisor just acquired Vacation Home Rentals, a Massachusetts-based vacation rentals website. It now features more than 550,000 rental properties worldwide, and if I’m not mistaken, that’s second only to HomeAway (AWAY) with 950,000. With 50 million people worldwide owning more than one home, there is a greater inventory of available vacation properties than ever before. Price-conscious consumers will continue to drive strong demand.
Online Restaurant Reservations: Rather than attempt to take on OpenTable (OPEN), the clear leader in the North American market, TRIP went out and paid $140 million to acquire Paris-based LaFourchette, whose online reservation software is used by more than 12,000 restaurants in France and Spain. In North America something like 20% of restaurant reservations are made online; in Europe it’s in the low single digits. Growth will come more easily overseas, reducing the investment required to make this acquisition a success. Certainly it has previous experience integrating acquired companies into its own.
Hot Stocks — Bottom Line
I really like both of these stocks.
However, given TRIP’s level of profitability, combined with mostly lower valuation metrics, I don’t think there’s any question that TRIP stock makes more sense when it comes to hot stocks at this point. Neither are cheap, but at least TRIP’s enterprise value isn’t 70 times EBITDA — that’s nosebleed country.
For now, stick with TRIP.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.