FAANG stocks dominated the stock market for a decade, but this year the elite group of stocks has fallen flat. Meta Platforms, Alphabet (GOOG 0.74%) (GOOGL 0.55%), Amazon, Netflix (NFLX -3.92%), and Apple have all fallen this year, and all but Apple have underperformed the Nasdaq.
However, 2023 could bring a change for these big tech stocks. Already, investors seem to be eyeing any sign that the Fed could pivot its monetary policy. The Nasdaqjumped more than 4% on Wednesday after Fed Chair Jerome Powell said the central bank may start to slow the pace of rate hikes at its December meeting.
If inflation continues to moderate in 2023, tech stocks seem likely to start rebounding after a disastrous 2022, as they've been hit hard by rising interest rates. Before we flip to the new year, here are two FAANG stocks to buy in the likely comeback in 2023.
1. The streaming star is back
Netflix stock collapsed at the beginning of the year after the company reported declining subscribers in the first half of 2022. However, the stock has made a surprising comeback since then, as it's returned to subscriber growth and launched an ad tier just six months after originally announcing plans for one.
While the company has said that it didn't expect the advertising tier to be material in the fourth quarter, co-CEO Reed Hastings indicated that he was thrilled with the ad business in comments at The New York Times DealBook conference. Hastings said he was wrong to resist the ad business, and wished the company had done it sooner.
Additonally, the company's theatrical release of Knives Out: Glass Onion was well-received and brought in an estimated $15 million in its opening and only weekend. Netflix released the movie in theaters for a week and will stream it later in December. The move shows the company is more willing to experiment with theatrical releases, which could be a valuable new revenue stream down the road.
Netflix stock also looks well-priced, trading at a price-to-earnings (P/E) ratio of less than 30, and earnings are likely to get a boost next year from the ad tier. Since streaming is largely recession-proof, Netflix should be able to manage through any macro headwinds. It also has an advantage over its streaming competitors, as many of them are focused on narrowing their losses by raising prices and controlling costs. Therefore, Netflix, which is already profitable, is in a better position to pick up quality content and grow its audience than its peers are.
2. Digital advertising isn't going away
Alphabet has seen its sales growth slow gradually over the course of the year, coming in at just 6% in the third quarter. The company blamed macro headwinds, a stronger dollar, and difficult comparisons for the weak performance, but it's not surprising to see its revenue growth slowing.
After all, advertising is a cyclical business, and it's one of the first expenses businesses pull back on when they anticipate a recession and conserve their budgets. That's exactly what's happening now, as a number of Alphabet's peers have reported similar trends.
However, demand is likely to rebound once the worst of the potential recession has passed, which could happen when the Federal Reserve stops raising interest rates.
The Google parent still has a monopoly in internet search, not to mention its YouTube video platform, and that has generated huge profit margins for the company.
That business will eventually recover, and investors can get a great deal by being patient. The stock trades at a P/E ratio of 20.3, essentially in line with the S&P 500, making it look cheap for a company that has consistently put up strong growth.
Alphabet has also promised to scale back on hiring through 2023, which should give its profitability a boost, and the company has been ramping up share buybacks as well.
The search giant has a lot of levers it can pull to grow profits next year, even if growth doesn't recover as fast as investors hope. The market is making a mistake assuming Alphabet's sluggish growth rate is anything more than temporary.
