This year's severe stock market sell-off could be a big opportunity for long-term investors. Yet between inflation and geopolitical strife, risks remain in the near to intermediate term.
But the large-cap FAANG stocks offer a nice combination of financial strength, growth prospects in their core businesses, profitability, and emerging projects in which they can afford to invest. So in turbulent times, they make good safe havens.
Amid the turmoil in the markets, here is perhaps the best risk-reward choice among FAANG stocks today.
Alphabet is defensive and offensive
Google parent Alphabet (GOOG 0.69%) (GOOGL 0.77%) is a FAANG stock one can buy today with confidence. Thanks to the technology sell-off, Alphabet is down about 13% from its recent all-time highs, in spite of a blowout recent earnings report.
In the fourth quarter, Alphabet's revenue surged 32%, accelerating over the 23% growth seen in the fourth quarter of 2020. Not only that, but looking under the hood, the drivers of that outperformance could very well last into 2022 and beyond.
Yet despite the booming results, the stock looks quite cheap. Currently, Alphabet trades at just 24 times earnings. However, that doesn't incorporate an extra $140 billion in cash sitting on its balance sheet, as well as its Google Cloud unit and Other Bets long-lived research and development projects, and their loss of more than $2 billion in combined operating losses last quarter.
Here's why Alphabet is so cheap now, and why the good times could continue.
The core search business has a long way to go
What really stuck out in the recent report was that the core Google Search engine, Alphabet's largest business and cash cow, is accelerating despite its massive size, up 35.7% last quarter. That's remarkable for a business of that size, which brought in $43.3 billion in revenue just last quarter alone. In fact, it's faster than Search was growing before the pandemic!
Although Search advertising took a hit in the early days of COVID-19, it was very temporary, as Search gathered strength quickly as the economy recovered through 2020. Moreover, Search is immune from recent iOS operating system IDFA changes, which have made it harder to track people across the internet. Those changes have made it more difficult for social media companies to target their advertising. Yet for Search, users freely enter in what they are looking for, so there is no tracking needed. Alphabet can also use that data from Search to inform its YouTube video platform, which also saw solid 25% growth in Q4 on top of difficult comparisons.
When combining Search, YouTube, Google's ad networks, and other Google services and hardware, Alphabet's "Google Services" brought in $26 billion in operating income last quarter alone and nearly $92 billion in 2021. With a current $1.78 billion market cap and $1.65 billion enterprise value, investors can see they are only paying a mid-teens multiple on this year's core operating income -- and this is for a business that grew revenue and profits in the mid-30% range this year. That's quite cheap.
Don't discount the Google Cloud Platform, either
With the stock trading at a cheap valuation just based on the core Search and other ad services alone, investors are also getting one of only three major cloud infrastructure companies essentially for free. Last quarter, the Google Cloud Platform saw revenue grow 44.6% to $5.5 billion, and to $19.2 billion for the full year. Although GCP saw $800 million in operating losses in Q4 and $3.1 billion in all of 2021, those losses are narrowing, down from $1.2 billion and $5.6 billion, respectively, in 2020.
As we've seen from the other two large cloud players, the cloud computing business can be profitable, and the cloud transition for global enterprises appears to be in its early innings. Although Google got a late start, it has the resources to compete aggressively. Clearing $20 billion in revenue this year with losses narrowing, it could one day be a very profitable "second leg" for Alphabet to stand on in the future, outside of digital ads.
Gushing cash gives Alphabet further optionality
Finally, Alphabet generates so much cash that it can also afford to reward shareholders in other ways. That can take the form of both share repurchases, which are very rewarding to shareholders when a stock is undervalued. In addition, Alphabet makes several "Other Bets" in long-lived research and development projects, such as its self-driving unit Waymo.
Some investors are critical of the Other Bets segment, which burned through $5.3 billion in operating losses last year, up from $4.5 billion in 2020. However, I don't expect this situation to go on forever. Either some of these units will eventually bear fruit, or Alphabet will cancel these projects and those billions will fall to the bottom line. Either way, shareholders should win in the future.
In addition, Alphabet repurchased over $50 billion of stock last year, up 62% from the prior year and about 3% of its market cap, indicating it is getting more serious about shareholder returns.
It all adds up
Alphabet shareholders are getting a very safe stock today, because of Alphabet's wide moat in Search, its stellar balance sheet, growing share repurchases and its low valuation. Meanwhile, continued growth of digital ads, cloud computing, and other bets offer the potential for better-than-expected growth. That's why it's an ideal FAANG stock for investors today amid so much uncertainty.