For years, FAANG stocks (a phrase coined by CNBC's Jim Cramer) were among the best-performing large-cap companies. This acronym for these tech giants stands for:
- Facebook, now Meta Platforms (META 1.96%)
- Amazon (AMZN -1.20%)
- Apple (AAPL -0.67%)
- Netflix (NFLX -0.96%)
- Google, now Alphabet (GOOG 0.83%)
While all five companies in the grouping are solid businesses, some of the stocks have performed much better than others recently, and only one has outperformed the broader market this year.
With a performance like this, investors might wonder if some of these stocks now present as potential bargains or if are they down for good. Let's take a closer look and see if we can find an answer.
Shifting environments are dragging down two FAANG stocks
There's a clear gap between the worst two performers and the rest of the stocks. Netflix and Meta Platforms are having an abysmal year, and it's not for different reasons. Both companies are dealing with user-growth stagnation (or losses) and rising competition.
While Netflix used to be the gold standard for streaming services, it is now just one of many platforms consumers can choose from. Netflix also happens to be the most expensive, with the standard plan costing $15.49 per month. Those rising prices likely contributed to Netflix losing subscribers in both the first and second quarters this year.
As for Meta Platforms, it's facing heavy competition from ByteDance's TikTok. In the fourth quarter of 2021, Facebook's daily active users fell quarter over quarter for the first time on record (and in the first and second quarters, this metric barely increased above the no-growth threshold).
And because of privacy changes initiated by Apple's iOS platform, Meta's ads can no longer target its audience as precisely. As a result, customers aren't willing to pay as much for these ads, which caused Meta's average price per ad to decrease 14% year over year.
These two companies have had plenty of bad headlines and their stocks have been heavily sold off. However, their stocks are now pretty cheap, with Netflix and Meta Platforms trading at 21 and 12 times earnings, respectively, which are both all-time lows.
This low valuation might be warranted due to performance, but it also means any good news could kick-start these stocks. I don't think they are a buy yet, but investors need to keep an eye on this duo.
The lone outperformer
The only FAANG stock to outperform the market so far this year is Apple. While the other constituents have had their values slashed, Apple is holding at an expensive 25 times earnings, not far off the 30 times earnings it started 2022 at.
However, its time of reckoning could be coming. In its latest quarter (the third quarter of fiscal year 2022, ending June 25), Apple's revenue grew 1.9%, while its operating expenses grew much faster at 15%. This expense caused earnings per share (EPS) to fall from $1.31 last year to $1.20.
With lackluster performance like that, it's unlikely Apple will maintain its premium. Furthermore, Apple could see some sales pressure, with many consumers likely to tighten their spending habits due to economic uncertainty.
Because of Apple's overvalued state, I think investors should steer clear of this business until its valuation returns to a more average level.
Short-term headwinds, but still strong performance
That leaves Amazon and Alphabet, two companies facing challenging business environments, but with their long-term outlook remaining strong.
Amazon's commerce segment is facing difficult year-over-year comparisons due to last year's pandemic-influenced business. But Amazon's upcoming quarters won't have to deal with the tough year-over-year comparisons, so the stock could be primed to move higher. Unfortunately, it also hired too many people to handle the pandemic-related ordering surge, which caused its free-cash-flow profitability to evaporate. However, management is correcting its mistakes and should return to profitability in the third quarter.
As usual, its cloud computing business, Amazon Web Services (AWS), has continued its impressive growth. AWS is a bright spot in the company and is highly profitable.
Alphabet is primarily an advertising company: 80% of its revenue comes from this source. However, when the economy struggles, companies cut their ad budgets to save on expenses. This trend had a notable effect on Alphabet in the second quarter, but it still managed to grow revenue by 13% year over year and maintain an impressive 28% operating margin.
However, expenses also grew faster than revenue, which caused Alphabet's EPS to drop from $1.36 to $1.21 this year. Despite this, it trades at 18.6 times earnings, lower than the S&P 500's current 19.2 valuation.
Alphabet's revenue recovery should be impressive once the economy rebounds, as it has done over the past 15 years when the economy slows.
GOOG revenue (quarterly YoY growth). Data by YCharts.
I think both Amazon and Alphabet stocks are great buys here because they have been heavily sold off despite only experiencing short-term headwinds. Apple is just too expensive for almost no growth. Meta Platforms and Netflix are both interesting, but because of significant business changes, I've only got my eye on them and don't plan to buy right now.
