Over the very long term, the stock market has averaged an annual return of right around 10%, thereby allowing patient investors to double their money every seven to eight years. But for FAANG stock shareholders, gains have been far more robust in a much shorter time frame.
When I say "FAANG," I'm referring to:
- Facebook, which is now a part of parent company Meta Platforms (META 2.20%)
- Apple (AAPL 1.48%)
- Amazon (AMZN 1.84%)
- Netflix (NFLX 0.72%)
- Google, which is now part of parent company Alphabet (GOOGL 2.53%) (GOOG 2.52%)
Over the trailing decade (through March 31, 2022), Apple, Amazon, Netflix, and Alphabet have risen by 716%, 1,510%, 2,180%, and 768%, respectively. Meta, which debuted via initial public offering a little less than 10 years ago, has galloped higher by a cool 482%.
The reason the FAANGs have outperformed is pretty simple: they're innovative industry leaders. From Meta's leading social media assets to Alphabet's internet search share and Amazon's e-commerce dominance, these are the premier names in their respective industries -- and their operating cash flow often shows it.
But in spite of their outperformance, not every FAANG stock is necessarily a great investment at the moment. While two FAANG stocks can be confidently bought hand over fist right now, one stands out as a clear avoid.
FAANG No. 1 to buy hand over fist: Alphabet
Following the pullback in the broader market during the first quarter, Alphabet is potentially the most-attractive FAANG stock to buy right now.
For more than two decades, internet search engine Google has been the bread-and-butter sales and income generator for the company. Based on data from GlobalStats, Google has accounted for between 91% and 93% of monthly worldwide internet search share dating back at least two years. With such a dominant share of the internet search market, no one should be surprised that advertisers are willing to pay a premium to get their message in front of users.
What folks might not realize is that Alphabet is about much more than just internet search these days. Even though this remains a highly profitable part of its business, and operating margins should continue to improve over time, it's actually Alphabet's ancillary operations that could drive its greatest long-term growth prospects.
Streaming content platform YouTube has become one of the most-visited social sites in the world. During the fourth quarter, YouTube brought in a record $8.63 billion in ad revenue.
Perhaps even more exciting, Google Cloud is No. 3 in global cloud infrastructure spending. Google Cloud has consistently been growing by close to 50% on a year-over-year basis, and it recently hit a $22 billion annual revenue run-rate (as of Q4 2021). Since the margins associated with cloud services are considerably higher than advertising margins, the expectation is for Google Cloud to lead the charge in doubling Alphabet's operating cash flow by mid-decade.
Investors can currently scoop up shares of Alphabet for about 20 times Wall Street's forward-year earnings forecast, which is incredibly inexpensive when you consider the company is still growing by 15% to 20% on an annual basis.
FAANG No. 2 to buy hand over fist: Meta Platforms
The second FAANG stock investors can confidently buy hand over fist is Meta Platforms.
Meta was one of the worst-performing stocks in the S&P 500 during the first quarter. Wall Street has been less than enthused about the company's beefed up spending on the metaverse. Additionally, there have been persistent concerns about how Apple's iOS privacy changes could adversely impact ad-driven operating models. While these are tangible concerns, the beating shares of Meta have taken seems uncalled for given a variety of reasons.
To begin with, Meta Platforms still controls four of the most-popular social media destinations on the planet. Facebook had 2.91 billion users visiting its site monthly during the fourth quarter, with an additional 680 million unique visitors heading to Instagram and/or WhatsApp, which Meta also owns. That's 3.59 billion combined monthly active users, or more than half of the world's adult population. Advertisers are aware that Meta gives them the broadest reach among any social media platform, which is why Meta has such incredible ad-pricing power. The average price per ad rose 24% year-over-year in 2021.
Something else to consider is that Meta has the luxury to invest aggressively in the metaverse -- i.e., the next iteration of the internet, which'll allow connected users to interact with each other and their 3D virtual surroundings -- without hurting its core ad business. The company's family of apps generated nearly $57 billion in operating income last year. What's more, Meta ended 2021 with over $33 billion in net cash. There's more than enough wiggle room for Mark Zuckerberg to build his company's position as a leading metaverse player, even if a significant surge in metaverse revenue is a long way off.
The bottom line is that Meta is continuing to grow by a double-digit percentage annually, yet is only valued at a multiple of 15 times Wall Street's forward-year consensus earnings forecast. For comparison, Meta's forward-year price-to-earnings multiple has averaged 25 over the past five years. That's how much of a bargain its shares are right now.
The FAANG stock to avoid like the plague: Apple
On the other side of the coin is tech kingpin Apple, which I believe investors should avoid like the plague.
To be crystal clear, Apple has been a fantastic investment for much of the past 20 years. It sells the most-popular smartphone in the U.S., and generally has a long line of customers waiting outside its stores anytime a new product is released. It's a sign that Apple's innovation has been a driving force behind its growth.
Apple also deserves plenty of credit for shifting its focus to subscription services. Even though products (iPhone, Mac, and iPad) still account for the lion's share of the company's sales, subscription services are a faster growth opportunity over the long-term, and should help alleviate some of the sales lumpiness associated with product replacement cycles.
You might be asking, "If Apple is such a well-rounded company, why avoid it?"
First off, the company has benefited from more than 18 months of 5G-capable iPhone sales. This means its hit a lot of the low-hanging fruit when it comes to the 5G device replacement cycle. Surpassing last years' iPhone sales in 2022 is going to be a lot tougher, especially without any significant changes to newer iPhone models.
Persistent global supply chain issues (more specifically, semiconductor chip shortages) are another reason to be concerned about Apple. Last week, Nikkei Asia reported that Apple is reducing production of its lower-priced iPhone SE by 20%. Apple may be resilient, but it's not immune to supply chain problems.
But the biggest red flag might be Apple's uninspiring sales and profit growth. It's expected to be the slowest-growing of the FAANGs (8% estimated sales growth in 2022, followed by 6% in 2023), yet sports one of the higher forward-year price-to-earnings ratios (27). Keep in mind that Apple's earnings have been buoyed by aggressive share repurchases. Without these buybacks, Apple's near-term profit growth could slow to the low-to-mid single digits. There are simply better deals right now than Apple.