Long-time investors are no doubt familiar with the fabled FAANG stocks, which have been some of the most disruptive and wealth-generating companies of the past 10 years:
- Facebook parent Meta Platforms (META 2.98%)
- Apple (AAPL 0.64%)
- Amazon (AMZN 1.30%)
- Netflix (NFLX 4.17%)
- Google, which rebranded as Alphabet (GOOGL 1.27%) (GOOG 1.25%)
Every company on this list is the undisputed leader in its field. Meta Platforms has transformed how consumers interact with social media. Apple has the world's best-selling smartphone. Amazon is the undisputed leader in U.S. e-commerce. Netflix pioneered the field of streaming video. And Google became a verb for its dominance of internet search. As a result, these stocks have generated life-changing gains for investors, ranging from 412% to 2,540% -- even after the recent market decline.
Data by YCharts.
Furthermore, the recent bear market has pummeled technology stocks, with the Nasdaq Composite down a whopping 30% from last year's high. Some of the FAANG stocks have been hit even harder, with these tech titans shedding between 18% and 70% of their value.
With the FAANG stocks each selling at multiyear lows, which of the group is tops to buy for 2023? For my money, Amazon is ripe for the picking. Here's why.
The death of e-commerce has been greatly exaggerated
No conversation about Amazon is possible without discussing the 800-pound gorilla in the room -- e-commerce. After the lockdown-induced growth spurt of 2020, digital retail has experienced rapid deceleration, reverting to historical averages. Investors with a "what have you done for me lately" mindset are convinced that its best days are in the rearview mirror.
Amazon's recent results seemed to confirm investors' worst fears. In the third quarter, net sales of $127 billion grew 15% year over year, a far cry from the 38% growth Amazon generated in 2020.
Yet, it's important to put that slowing growth in context. We're in the throes of the worst economic downturn since 2009. Consumers are having to scale back spending in the face of near 40-year high inflation and rising interest rates. Given time, the economy will no doubt recover -- it always does.
Overall, e-commerce growth is stalled, but once the economy recovers, so too will consumer spending. The global e-commerce market is slated to grow from $3.3 trillion this year to $5.4 trillion in 2026, representing 27% of all retail, according to estimates calculated by Morgan Stanley. Amazon commanded 38% of online sales in the U.S. for the first half of 2022 -- more than its next 14 rivals combined. This shows that the company is well positioned to benefit from the inevitable rebound of consumer spending and the continuing growth of e-commerce.
Head in the clouds
Digital retail isn't the only area that Amazon dominates. The company pioneered cloud computing and is still the industry powerhouse, with a market share of 32%, well ahead of Microsoft Azure and Google Cloud, which account for 22% and 9%, respectively, according to Canalys.
AWS has held up remarkably well so far this year, particularly given the state of the economy, as revenue grew 32% year over year in the first nine months of 2022. Some businesses are reining in spending, but a vast opportunity remains. Cloud computing is expected to grow severalfold this decade, climbing from $380 billion in 2021 to $1.6 trillion by 2030. As the undisputed leader in the space, Amazon will no doubt benefit from this ongoing trend.
That's not all
If that weren't enough, over the past several years, Amazon has ascended the ranks to become a digital advertising powerhouse. Not only is Amazon the No. 3 provider of online advertising (behind Alphabet and Meta Platforms), but it also continues to grow much more quickly than its chief rivals.
In the third quarter, Amazon's advertising services revenue grew 25% year over year, outpacing the results by Alphabet, which grew 2%, and Meta Platforms which declined 4%, during the same period.
The fine print
Just to be clear, I'm not badmouthing any of the FAANG companies. I own each and every one of these stocks. As a group, and as of this writing, they represent 29% of my total personal wealth. It's also important to note that I didn't "back up the truck" on any of these, but rather made several modest investments over the past decade and let the companies do the heavy lifting from there.
That said, Amazon represents an amazing opportunity for investors with the resources and patience to see it through. The stock is currently selling for its cheapest valuation since 2015. A reasonable price-to-sales ratio is generally between 1 and 2, a bar Amazon clears with ease, selling for just 1.7 times next year's sales -- making it the cheapest of all the FAANG stocks.
Given its strong position in three growth industries, its vast opportunity, its history of strong growth -- even amid economic headwinds -- and its cheapest valuation in years, Amazon has earned its spot as my top FAANG stock for 2023.
