The unique challenges wrought by the pandemic made it a boom or bust year for many stocks. As a result, the vaunted FAANG stocks -- Facebook (FB -8.80%), Amazon (AMZN -3.44%), Apple (AAPL -2.79%), Netflix (NFLX -3.56%), and Alphabet (GOOG -6.19%) (GOOGL -6.19%) -- each outperformed the S&P 500 and did so by a wide margin. The increased need for social media, e-commerce, communication, in-home entertainment, and internet tools gave each company a significant boost during 2020.
Alphabet stock was the worst performer of the group, up 31%. That was still nearly double the 16% returns of the broader market. Apple was the undisputed winner among the FAANG stocks, with stock price gains of 81%.
The recent rotation out of technology and high-growth stocks has some investors abandoning the tech titans over concerns that their best days are behind them. A quick look at these industry leaders shows that one of them still represents a compelling opportunity and should be on every investor's buy list, while one has significant challenges ahead.
The one FAANG stock I'd buy right now
There's no question that a greater number of consumers adopted streaming video last year, driven by the need for in-home entertainment options. Netflix was among the biggest winners, adding more than 36 million subscribers in 2020, bringing its total customer base to nearly 204 million. Of those new 2020 additions, roughly 83% came from outside the U.S., illustrating the strength of Netflix's international growth story. At the same time, its full-year revenue grew to $25 billion, up 24%.
The longest-running argument by Netflix bears has been that the company would drown in the red ink generated by the production cost of its growing content library before it was able to begin generating positive free cash flow (FCF). However, two recent revelations in Netflix's fourth-quarter earnings report have put that fallacy to rest. First, the company expects to be FCF positive next year, after achieving breakeven in 2021. Second, and perhaps more important, Netflix said it will no longer need to raise external capital to fund its "day-to-day operations."
To be clear, Netflix still plans to maintain roughly $10 billion to $15 billion in gross debt, but will begin paying down debt using cash from operations as it comes due. The company also plans to "explore returning cash to shareholders through ongoing stock buybacks."
The revised bear narrative goes something like this: Viewers who signed up during the pandemic won't have any reason to continue their memberships once the world reopens. But there simply isn't any evidence to suggest that's true. In fact, CEO Reed Hastings revealed that in terms of both engagement and churn, the subscribers who joined over the past year are behaving much the same as their pre-pandemic cohorts. This suggests that the majority of those subscribers are here to stay.
Netflix's transition to cash generation is well ahead of schedule, its international expansion continues to gain converts, and recent subscribers have settled in for the long haul. With all that working in the company's favor, I think Netflix is a buy right now.
The one FAANG stock I'd avoid
Facebook has been a star performer for investors over the past decade, and its recent results seem to suggest that the good times could continue. The social media giant delivered revenue that grew 22% in 2020, while net income grew 58%. At the same time, its daily active users of 1.84 billion climbed 11%, while those who sign in at least monthly increased 12% to 2.8 billion. While those results suggest things are rosy, there's trouble just below the surface, as Facebook is fighting battles on multiple fronts that might impact the company's future growth.
Nearly all of Facebook's revenue comes from targeted advertising, but doing that effectively is about to get a lot harder. In a soon-to-be-released version of iOS 14, Apple will notify users which apps are tracking them for the purposes of targeted advertising, and iPhone users will be required to specifically opt-in for each of these apps. As a result, it's estimated that the number of users sharing data will drop from the current level of roughly 70% to between 10% and 15%. With an installed base of nearly 1 billion iPhones, that's a big chunk of users. Facebook has already said this will significantly hamper its ability to effectively target advertising.
That's not all. Late last year, the Federal Trade Commission, along with 46 states, filed suit against Facebook for monopolistic practices. The government regulator is seeking to unwind the company's acquisitions of WhatsApp and Instagram, which could be a huge blow to Facebook and its ability to prosper going forward. A breakup may not happen, but the unwanted glare of regulators isn't restricted to the U.S., as government agencies worldwide are increasingly focusing on consumer privacy.
Just to be clear: I'm a Facebook shareholder and I'm not selling the shares I own. But given that the company's future growth prospects could be in jeopardy, I certainly don't recommend buying Facebook shares anytime soon.