It's been multiple generations since investors have contended with such a challenging year on Wall Street. At the halfway mark of 2022, the benchmark S&P 500, which is viewed as the most-encompassing stock market barometer, had delivered its worst first-half return in 52 years!
Despite this turmoil, Wall Street's brightest and most-successful money managers have remained grounded. According to Form 13F filings with the Securities and Exchange Commission, most billionaire money managers were active buyers as the stock market plunged into a bear market during the second quarter.
However, sentiment was clearly mixed when it came to the FAANG stocks. By "FAANG," I'm referring to:
- Meta Platforms (META -0.43%), which was formerly known as Facebook
- Apple (AAPL -1.00%)
- Amazon (AMZN 0.23%)
- Netflix (NFLX -0.83%)
- Alphabet (GOOGL -0.09%) (GOOG -0.02%), which was formerly known as Google
Among these industry leaders are two FAANG stocks billionaires have been buying hand over fist, as well as one FAANG they've been avoiding like the plague.
FAANG stock No. 1 billionaires are buying hand over fist: Alphabet
The first FAANG component billionaire fund managers can't seem to get enough of is Alphabet, the parent company of streaming platform YouTube, autonomous car company Waymo, and widely used internet search engine Google.
Based on recent 13F filings, a number of prominent billionaires built up their stakes in Alphabet. This includes Stephen Mandel of Lone Pine Capital, who started a nearly 3.44-million-share position during the second quarter, along with Chase Coleman of Tiger Global, Ken Fisher of Fisher Asset Management, and John Overdeck and David Siegel of Two Sigma Investments. Tiger Global, Fisher Asset Management, and Two Sigma respectively purchased approximately 2.21 million shares, 1.36 million shares, and 1.05 million shares.
Easily one of the best reasons to confidently buy into Alphabet is the company's leading internet search segment. Over the past two years, Google has commanded up to 93% worldwide internet search market share. With its closest-competitor 88 percentage points behind it, Google is able to command top-tier pricing power when placing ads on search pages. This is a competitive advantage that isn't going away anytime soon, and should allow parent Alphabet to benefit from disproportionately long periods of economic expansion.
However. It's Alphabet's ancillary operations that many investors find even more intriguing. YouTube has grown into the second most-visited social media site in the world, while Waymo appears to be light years ahead of electric-vehicle kingpin Tesla in terms of bringing autonomous vehicles into our everyday lives.
But it's cloud-service provider Google Cloud that could be Alphabet's greatest long-term asset. Cloud spending is still in its early stages, and Google Cloud has already gobbled up 8% of global cloud infrastructure spending, according to a report from Canalys. Though Alphabet's cloud segment is a money-loser at the moment, the margins associated with cloud services are often considerably higher than the margins generated from advertising. In other words, Google Cloud can be Alphabet's key to multiplying its operating cash flow.
FAANG stock No. 2 billionaires are buying hand over fist: Amazon
The second FAANG that billionaire fund managers have been buying hand over fist is e-commerce giant Amazon.
During the second quarter, a half-dozen of the brightest billionaires gobbled up shares of Amazon: Jeff Yass of Susquehanna International, Overdeck and Siegel of Two Sigma, Fisher of Fisher Asset Management, Ken Griffin of Citadel Advisors, and Philippe Laffont of Coatue Management. In order, these billionaires oversaw the respective addition of nearly 6.59 million shares, 1.83 million shares, 1.38 million shares, 1.26 million shares, and 1.09 million shares to their fund.
For many investors, Amazon's lure has always been its superior online marketplace. In terms of U.S. online retail sales, Amazon has more than five times the share of the next-closest competitor, and generates more revenue from online sales than its next 14-closest competitors on a combined basis.
But the reality is that online retail sales are a low-margin revenue stream for Amazon. What's far more important for the company are its ancillary sales channels, which are generating juicier operating margins. For instance, Amazon has steadily become an advertising juggernaut. Even during the challenged second quarter, ad sales jumped 18% from the prior-year period. Advertising margins are substantially higher than online retail sales.
Amazon has also used the popularity of its online platform to sign up more than 200 million people to its Prime service. Based on the company's second-quarter operating results, it's generating almost $35 billion in annual run-rate sales from high-margin, transparent subscription revenue.
And don't forget about Amazon Web Services (AWS), the world's leading cloud infrastructure service provider. Even though AWS has accounted for just 16% of the company's net sales through the first six months of 2022, it's brought in for more than 100% of its operating income over the same span. AWS is Amazon's golden ticket to potentially tripling its cash flow by mid-decade.
The FAANG stock billionaires are avoiding: Netflix
On the other hand, one FAANG stock has sent billionaires running for the exit. Since its share price fell off a cliff earlier this year, billionaires have largely avoided streaming provider Netflix.
Filings with the Securities and Exchange Commission show that four billionaires reduced or exited their Netflix positions entirely during the second quarter. This included Bill Ackman, whose Pershing Square Capital Management is winding down operations, Steven Cohen's Point72 Asset Management, Laffont's Coatue Management, and Griffin's Citadel Advisors. All told, these four billionaires respectively axed around 3.11 million shares, 231,000 shares, 201,000 shares, and 141,000 shares from their fund.
For years, Netflix was the streaming content kingpin. Its combination of proprietary shows, domestic streaming dominance, and potential to expand internationally into untapped markets, made it a popular buy. But times have changed, and so has Wall Street's opinion of Netflix.
Competition in the streaming space has heated up quickly as traditional cord-cutting has enticed legacy content providers to dangle streaming packages and bundles in front of users. The "House of Mouse," Walt Disney (DIS 0.09%), serves as a perfect example of a streaming provider capitalizing on its own proprietary content and branding. In the less than three years since launching Disney+, the company has gained more than 152 million subscribers. It took Netflix more than a decade to reach those figures after shifting its focus from DVD rentals to streaming. It's particularly noteworthy that Disney is gaining a significant number of subscribers as Netflix endures a subscriber decline.
The other big issue for Netflix is the company's cash generation. Even though Netflix has been profitable on an adjusted basis, the company had been burning cash for a long time as it spent aggressively on new content and international expansion. Even though it appears to have turned the page on jaw-dropping cash burns, the net cash provided to its from operations has been negative or negligible in four of the past five quarters.
While Netflix is about as inexpensive as it's ever been on an adjusted earnings basis, the company's minimal cash flow and increased competition serve as red-flag warnings for investors.