FAANG stocks -- essentially the top five stocks of the tech sector -- as a group cooled off in 2021. Alphabet (GOOG 0.37%) (GOOGL 0.35%) led the group of growth stocks with a 65% return for the year, followed by Apple's (AAPL -0.57%) near-34% return. The rest of the group -- Meta Platforms (META 1.54%), Amazon (AMZN -1.14%), and Netflix (NFLX -0.51%) -- all underperformed the S&P 500 index, which returned nearly 27% for the year. Amazon stock was the biggest underperformer of the year, climbing just 2.4% in 2021.
But investors should always be looking forward, so here's what they can expect from the FAANG stocks in 2022.
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Easier comparables will benefit Amazon and Netflix
2020 was a great year for both Amazon and Netflix. Amazon benefited from a massive shift to e-commerce amid the worst parts of the coronavirus pandemic. Likewise, Netflix saw a rush of subscribers as more consumers stayed home and sought living-room entertainment.
But the hangover hit both of them hard last year. Amazon's core online retail business grew just 13% and 3% in the second and third quarters of 2021, respectively. Its profits shrunk relative to 2020 levels, too, as it invested in building out its fulfillment network, hired more workers, and paid them more.
Netflix saw subscriber growth fall off starting in the third quarter of 2020 after it managed to add nearly 26 million subscribers in the prior two quarters. It added fewer than 10 million subscribers through the first nine months of 2021.
Yet both companies should see more normalized growth in 2022. Amazon says its capacity constraint issues are mostly behind it and it should continue to outpace the growth of online retail. Also, Netflix is set to release more originals in 2022 than 2021, including several highly anticipated series like the finale of Ozark and season four of Stranger Things.
Meta Platforms could be an advertising winner
The digital ad industry saw a big change last summer when Apple introduced new privacy features in iOS 14. Users are now prompted to opt into cross-app data tracking, which can make tracking ad conversions very difficult. As a result, social media apps saw a reduction in ad spending across the board, as advertisers could no longer determine whether they were spending wisely or not.
Google was a clear winner from the shift in ad spending. It posted its fastest advertising revenue growth rate in more than a decade -- 43% -- in the third quarter. Its core search advertising business benefits from easily tracked advertisements on any web browser without the need to share data between multiple apps.
But Meta could recover more quickly than its peers in the all-important social media advertising channel. It's developing new ad measurement tools and systems while building up services that could allow ads to convert within its walled gardens like Facebook Shops.
Meanwhile, engagement with its apps remains strong, with Instagram recently surpassing 2 billion users. Compared to most other social media platforms, Facebook and Instagram historically offer the ability to target and convert better, commanding a premium price. So, Meta could see its core revenue source grow faster relative to its competitors, leading its stock price higher in 2022.
That said, it'll be harder for Alphabet to maintain its momentum built in the back half of 2021. The benefits of the privacy changes on the mobile operating systems seem to be baked into the stock price. Nonetheless, it remains a top channel for digital advertising with Google, YouTube, and various other advertising platforms all interconnected, allowing more ad retargeting opportunities (getting users to see ads more than once). Google should at least keep pace with the overall industry, but that could seem disappointing after a stellar 2021.
Can Apple push past $3 trillion?
With a market cap pushing $3 trillion, it's hard to see Apple's share price continuing to grow at the same pace it did last year. Doing so would mean an additional $1 trillion flows into Apple stock over the next year. Even so, Apple has a few big positives that could allow its stock to remain a strong investment.
First of all, it could see another record year for iPhone sales in 2022 with greater adoption of 5G and subsiding supply chain constraints. The iPhone accounts for half of Apple's revenue, so growing unit sales would have a massive impact on its top line.
Second, Apple continues to grow its services business, which produces much higher profit margins than its hardware business. The services business growth is the result of a larger install base and greater revenue per user as it increases adoption of its first-party subscriptions and grows App Store sales per user.
Third, Apple may introduce new hardware in 2022: an AR/VR headset. While a new device may not generate significant revenue right away, it could spur further adoption of headsets and the development of metaverse applications. It could be Apple's next Apple Watch or AirPods.
Finally, Apple has become a safe harbor for many investors. With bonds offering very low returns, Apple's ironclad balance sheet and strong cash flow make it attractive in the low-yield environment. Not to mention, it still offers a 0.5% dividend yield, which will likely see another increase this year.
Although Apple may not provide market-trouncing returns again in 2022, it's still a solid investment option for most.
Ranking the FAANGs
I think all five of the FAANG stocks could make a good investment in 2022, and I continue to hold positions in all of the stocks. But if I were to add to those positions, here's how I would prioritize them based on today's prices and the outlook for 2022.
- Amazon. Its retail business should see a reacceleration in growth while its cloud-computing and advertising businesses drive the bottom line higher.
- Netflix. After underperforming on subscriber additions since late 2020, it should see a return to normalized growth and content releases in 2022.
- Meta. The impact of mobile OS privacy changes is priced in, and it's best positioned to overcome those challenges.
- Alphabet. A simple play on the secular growth of digital advertising.
- Apple. If history has taught me anything, it's to never bet against Apple.
