In a high-flying market you can usually find an Icarus or two – companies that rise too far, too fast, and fall hard when the party stops. What we saw with Apple Inc. (NASDAQ:AAPL) last year can happen again.
In the current bull market, two great candidates are Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX). Both now sell at prices that have nothing to do with earnings. Both offer something many people find of value.
While both are likely to fall in a down market, one is likely to fall harder. Which one?
The Case for Amazon
JPMorgan is among those brokers now making a more bearish case for Amazon.com, Inc. (NASDAQ:AMZN), lowering price targets. Piper Jaffrey has done the same. Of the 41 analysts now following it, 11 are now at neutral, 30 are at buy or overweight.
No one disputes the company’s future, but many see competition eating into its growth rate. Seeking Alpha’s Paolo Santos says Google has it in its sights. It wants more cloud market share, but it’s also aiming at Amazon Prime with its own same-day shipping service, created on behalf of brick-and-mortar merchants.
While Google should be of concern due to its low costs, Amazon.com, Inc. (NASDAQ:AMZN) has been beating them badly for some time. Amazon is continuing to cut cloud prices aggressively, while adding new features and the Amazon API is the industry standard. It’s doing much the same thing with its Kindle Fire tablets, cutting prices aggressively. Unlike Google (and even, to an extent, Apple) Amazon has also turned the Kindle after-market into a money-making machine.The company is also launching a TV campaign, focused on the fashion category, one even many users of Amazon may not know it has.
The only compelling case for Amazon’s fall remains valuation. I sold my own shares at $230 months ago, and it’s up 15% from there to $263. In the end the value of a stock is based on what people are willing to buy it for. I’d be happy to get back in where I got out, but wonder if I’ll get the chance.
The Case for Netflix
Some of the bearish case for Netflix, Inc. (NASDAQ:NFLX) is based on the bullish case for Amazon.com, Inc. (NASDAQ:AMZN). Amazon Prime now has 10 million members, who get some free videos and cheap prices on others, in contrast to Netflix’ all-you-can-eat pricing. It’s now testing a $7.99/month plan that will directly compete with Netflix and competing directly with it in the battle for rights.
Netflix was really treading water until mid-January, when an NPD Group report showed that most people stream to their TVs, not devices. TVs are Netflix, Inc. (NASDAQ:NFLX)’s strength, as many sets have its software installed in them. This sent the stock off to the races – it’s up 87% since then.
The company is also well aware of the challenges it faces from Amazon and Google. It has its own open source cloud platform to compete with Amazon, it’s extending its reach into many places through appliances like Google’s, and it’s offering cash prizes to developers who can extend that platform.
Netflix made itself dependent on Amazon.com, Inc. (NASDAQ:AMZN)’s cloud, causing major outages over the last year, but under Neil Hunt it is continuing to install its Open Connect servers at major streaming points, pushing the location of Netflix content closer to customers throughout the U.S. and Europe. The company is increasing its integration with Facebook to make the service more social. This is why the Fool’s Tim Beyers calls Netflix “one of the best companies in America.”
Still, at its current price Netflix, Inc. (NASDAQ:NFLX) is pretty rich. It needs significant growth, on both the top and bottom line, to justify it.
Which Do You Short
If I were to short either of these stocks – and I don’t short – I would short Netflix, Inc. (NASDAQ:NFLX). It is far more volatile, and volatility cuts both ways.
I am among those who question how far and fast the bull can run when government policies are cutting 2.5% out of GDP, with the bulk of the impact expected in the next quarter. Barring a reverse of that policy – the end of the sequester – I expect a market correction around May.
When that happens I will be watching both these stocks closely. I would like to get back into Amazon.com, Inc. (NASDAQ:AMZN), and will be interested to see what Netflix, Inc. (NASDAQ:NFLX) does, because I actually like some aspects of their technology better. My own buy price for Amazon, as noted, is about $230, and I might nibble some Netflix about $100. But the former is $33 below current figures, and the latter is $86 below, so for now I’ve got lots of cash to play with.
The article Does Amazon.com or Netflix Crack First? originally appeared on Fool.com and is written by Dana Blankenhorn.
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