To say that the year has been bad for investors is perhaps an understatement. The bond market is having its worst year in its history, while the much watched S&P500 achieved their worst first-half comeback in over half a century.
But when heightened volatility and uncertainty arise, investors often turn to companies that have a history of winning. Perhaps no business group stands out more than the FAANG Shares.
When I say “FAANG”, I am referring to:
- Facebook, which is now a subsidiary of the parent company Metaplatforms (META 6.53%)
- Apple (AAPL 0.39%)
- Amazon (AMZN -0.49%)
- netflix (NFLX -0.84%)
- Google, which is now a subsidiary of the parent company Alphabet (GOOGL 2.21%) (GOOG 2.25%)
In addition to significantly outperforming major US equity indices, FAANG stocks are industry leaders. For example, Amazon has the most dominant online market and Meta Platforms social media sites attract the most unique monthly active users. It is these competitive advantages and collective history of innovation that have made FAANG stocks popular buys during any stock market weakness.
But even among the FAANG there is a hierarchy. Right now, two FAANG stocks stand out as incredible deals that can be bought hand in hand, while another looks entirely avoidable.
FAANG n°1 to buy hand on hand: Alphabet
Alphabet, the parent company of search engine Google, streaming platform YouTube and self-driving vehicle company Waymo, is the top FAANG stock to buy right now.
The most glaring problem for Alphabet is that the the lion’s share of its revenue comes from advertising. With interest rates rising rapidly, there is an increased likelihood of a recession on the horizon. Ad spend is often one of the first things to be hit when the winds of economic weakness begin to blow. The company’s third-quarter operating results certainly demonstrated those struggles, with year-over-year revenue up just 6%, or 11% excluding currency movements.
But that only tells part of the story. While short-term struggles shouldn’t be swept under the rug, it’s important to understand the context surrounding this publicity downturn. Although recessions are an inevitable part of the business cycle, they are often short-lived. By comparison, economic expansions typically last for years. Advertising can fluctuate, but an advertising giant like Alphabet spends far more time in the sun than under storm clouds.
A big reason for this is its absolutely dominant search engine, Google. GlobalStats data shows that Google has maintained at least 91% of global Internet search share — again, a global share of 91% research on the Internet — with more than two years of hindsight. Advertisers understand that Google offers them the best chance of reaching as many consumers as possible with their message.
But when it comes to long-term growth, YouTube and Google Cloud can take over. YouTube is the second most visited social site in the world, behind Meta’s Facebook, and looks set to generate $29 billion in full-year ad revenue. Meanwhile, Google Cloud makes more than $27 billion in annual sales and saw 38% revenue growth in the quarter ending September. In the middle of the decade, Google Cloud could become a major cash engine for the company.
Opportunistic investors can buy shares of Alphabet right now for about 9 times the cash flow Wall Street predicts for the company in 2024. That would be well below the company’s historical cash flow multiple.
FAANG #2 To Buy Hand On Fist: Meta Platforms
The second FAANG stock to buy from hand to hand is arguably the one that has fallen most out of favor with Wall Street and everyday investors: Meta Platforms.
One of the reasons skeptics aren’t thrilled with Meta is its reliance on advertising. Just over 98% of the $27.7 billion in sales generated by Meta in the third quarter came from advertisements. Just as Alphabet has been weighed down by lower ad spend, so will Meta, at least in the short term.
The other issue for Meta Platforms is CEO Mark Zuckerberg’s insistence on spending aggressively to develop metaverse innovations. The metaverse is the 3D virtual world where connected users can interact with each other and with their environment. Reality Labs, the company’s Metaverse operating division, lost $9.4 billion in the first nine months of 2022, and there’s no sign that spending will slow down anytime soon.
But, again, this skepticism tells an incomplete story. While these headwinds are tangible, they overlook Meta’s key enablers and benefits that haven’t changed, despite its recent weakness.
For example, Meta remains more dominant than ever with its social media assets. Facebook, Facebook Messenger, WhatsApp and Instagram are consistently among the most downloaded social apps in the world. Additionally, Meta acknowledged 3.71 billion unique monthly active users across its family of apps in the third quarter. This equates to more than half of the world’s adult population visiting at least one Meta-owned site every month. Although ad pricing is currently low, advertisers have already demonstrated their willingness to pay high prices to reach Meta Platforms’ billions of users.
The other important consideration is that Meta’s balance sheet gives him the flexibility to invest in what could very well be a multi-trillion dollar opportunity. As the curtain closed in September, Meta had nearly $32 billion in cash, cash equivalents and marketable securities, after subtracting all outstanding debt. Even though much of the company’s free cash is diverted to Reality Labs, Meta is expected to generate north of $16 per share in operating cash flow this year. Paying less than 6x operating cash flow for a dominant company like Meta Platforms would be historically cheap.
FAANG stock to avoid like the plague: Netflix
Across the aisle are the FAANG stock investors that would be smart to avoid like the plague: media giant Netflix.
Netflix obviously did some things to reach a market capitalization of $116 billion. Its pivot to streaming content more than a decade ago paved the way for it to capture the leading share of the US streaming market. Since that pivot, Netflix’s global subscriber count topped 223 million last quarter.
The company also has exceptional pricing power, which is due to its growing content library and long list of exclusive shows. Being able to pass on price increases without losing subscribers is a powerful tool for increasing revenue and profits.
But Netflix wouldn’t be a stock to avoid if it didn’t have clearly defined headwinds that could set back its future growth potential. Arguably the biggest problem for Netflix is the relatively low barrier to entry for streaming services. As the cord-cutting continues to foster a push towards streaming, there are more choices for consumers than ever, and that has significantly slowed Netflix subscriber growth.
Perhaps the biggest red flag is how quickly Disney+’s waltz disney gained traction on Netflix. Less than three years after the launch of the Disney+ streaming service, more than 152 million people worldwide have subscribed. Walt Disney has reached subscriber levels that took Netflix more than a decade, and the House of Mouse arguably evokes a much stronger emotional engagement and connection with its exclusive content and characters than Netflix ever can. with its own content.
The other concern for Netflix is its long history of consuming money. Expanding into international markets doesn’t come cheap, but it’s an absolute necessity when competition is fierce in the United States. Unfortunately, this aggressive spending has pushed Netflix to 58 times Wall Street’s projected cash flow in 2022 and 43 times projected cash flow in 2023. This makes Netflix the most expensive FAANG stock, relative to cash flow. operating cash flow, of a considerable amount.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Sean Williams has positions in Alphabet (A shares), Amazon and Meta Platforms, Inc. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Meta Platforms, Inc., Netflix and Walt Disney. The Motley Fool recommends the following options: January 2024 Long Calls at $145 on Walt Disney, March 2023 Long Calls at $120 on Apple, January 2024 Short Calls at $155 on Walt Disney, and March 2023 Short Calls at $130 $ on Apple. The Motley Fool has a disclosure policy.