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Microsoft vs. Netflix

The company does have an encouraging amount of levered free cash flow ($1.43 billion) and could use that to boost earnings potential through an acquisition or, even smarter, by offering "starving" shareholders a long-overdue dividend.

Here's a five-year chart that colorfully illustrates Netflix's plight. NFLX Chart NFLX data by YCharts

Netflix will report its next quarterly earnings results on Oct. 23 and shareholders will be listening carefully for the details and what kind of guidance going forward the company will offer.

Microsoft (MSFT - Get Report) is on the precipice of some significant earnings stimulants. With the advent of Windows 8 and the heralded Microsoft Tablet releases, MSFT and its earnings potential will be getting a large dose of publicity.

Shareholders hope it will mostly be positive and a boon to the stock's price which has taken a haircut of late. Let's take a look at a comparable five-year chart of Microsoft to see the story. MSFT Chart MSFT data by YCharts

Clearly, its diluted, year-over-year quarterly earnings could use a boost. But with the stock now selling at around $29 a share, it is trading with a forward (one-year) PE of only 8.79, making Microsoft appear more like a stodgy energy company than a technology innovator.

The trailing-12-month PE ratio is also a modest number (14.50), and this is a company that has a current dividend yield-to-price of a mouth-watering 3.2%. This member of the Dow Jones Industrial 30 has over $62 billion in total cash and $23.62 billion in levered free cash flow. The current dividend represents a sustainable payout ratio of only 38%.

By way of comparison, its operating margin stands at 38% and its profit margin at 23%. One measure of a stock's fair-market-value is its Price-to-Earnings-to-Growth (PEG) ratio. Microsoft's PEG ratio (five-year expected) is a low 1.12. Netflix's PEG ratio isn't currently available (one has to wonder why) while iconic Apple (AAPL) is still the "low price leader" with a PEG ratio of only 0.60, suggesting it is still undervalued.

Back to MSFT versus NFLX: If you're an investor who wants to own shares of a company that has so many ways of making profits that the only way to remember them all is to go to its Web site's "products" page, MSFT is the clear winner.
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