With less than a week to go before we turn the page on 2022, it's fair to say it's been one of the worst years for investors in a long time. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have all entered respective bear markets, with the major indexes on track to deliver their worst returns since 2008.

Worse yet, the usually sure-footed FAANG stocks haven't been spared from the carnage. By "FAANG," I'm referring to:

  • Facebook, which is now a subsidiary of Meta Platforms (META 0.11%)
  • Apple (AAPL -0.82%)
  • Amazon (AMZN -0.09%)
  • Netflix (NFLX 2.47%)
  • Google, which is now a subsidiary of Alphabet (GOOGL 0.93%) (GOOG 0.92%)

Through the closing bell on Dec. 22, 2022, Meta, Apple, Amazon, Netflix, and Alphabet (the Class A shares, GOOGL) were respectively lower by 65%, 25%, 50%, 51%, and 39% on a year-to-date basis. Yuck!

A visibly concerned stock trader grasping their head while looking at losses on their computer monitor.

Image source: Getty Images.

The FAANG stocks are all facing significant headwinds in the new year

The unfortunate issue for these industry leaders is that their near-term headwinds aren't going to disappear overnight.

For example, Apple has been the leader of this group, with a decline in 2022 of "only" 25%. Not only is it likely to deal with continued supply chain uncertainty tied to China's COVID-19 mitigation policies, but rapidly rising interest rates have removed its access to cheap capital. For years, Apple has leaned on ultra-low-rate debt offerings to raise capital for share repurchases. That's very unlikely to occur in 2023.

Netflix is another FAANG stock that'll be facing its own set of difficult circumstances in the new year. Walt Disney recently surpassed Netflix in terms of aggregate streaming subscribers (Disney+, Hulu, and ESPN+, combined), and Netflix's aggressive international expansion has led to cash outflows or relatively minimal positive operating cash flow. At a time when valuations have come under scrutiny, Netflix's premium valuation to its cash flow stands out for all the wrong reasons.

As for ad-driven businesses Meta Platforms and Alphabet, ad spending looks to take a serious hit for at least the early portion of 2023. It's not uncommon for advertisers to pare back spending when economic uncertainty arises. That's an especially big problem for Meta given that its increased spending on metaverse projects has substantially shrunk its free cash flow.

Lastly, Amazon is expected to deal with weakness from its flagship e-commerce marketplace. Even though online retail sales aren't where Amazon generates most of its operating cash flow, it's the operating segment that's become the face of the company. High inflation and a potentially weaker U.S. economy bode poorly for Amazon's top revenue-producing segment in 2023.

A person using a stylus to interact with a rapidly rising stock chart displayed on a tablet.

Image source: Getty Images.

The best-performing FAANG stock for 2023 is likely to be...

However, not even the FAANG stocks are created equally. Even though these five stocks have been industry leaders and outperformers for more than a decade, they'll likely produce very different returns next year.

Among Meta, Apple, Amazon, Netflix, and Alphabet, there stands one company that has a good chance to outperform its peers in 2023. That company is Google, YouTube, and Waymo parent, Alphabet.

As noted, Alphabet is almost assured of ad-spending weakness during the first half of 2023. With the Federal Reserve expected to further raise interest rates, the likelihood of a U.S. recessions grows. Ad spending tends to front-run the prospect of economic weakness.

But there's another side to this coin. Though ad spending is highly cyclical, the economic cycle very much favors the patient. While recessions are an inevitable part of that cycle, they usually last for no more than a couple of quarters. By comparison, economic expansions are measured in years. Ad-price weakness for Alphabet should prove temporary.

To build on this point, Alphabet is a veritable monopoly in the internet search space thanks to Google. Looking back through three years of monthly data from GlobalStats, internet search engine Google has accounted for no less than 91% of all global search share. It's pretty clear that Google gives advertisers the best chance to reach their targeted audience, which more often than not means ad-pricing power will be in Alphabet's favor.

Another reason to be excited about Alphabet is because of its ancillary operating growth. Its acquisition of YouTube for $1.65 billion in 2006 looks smarter with each passing day. According to figures from DataReportal, YouTube has 2.52 billion monthly active users (MAUs), which is second among social media sties only to Facebook's slightly more than 2.9 billion MAUs. Alphabet is in the process of improving monetization for YouTube Shorts (short-form videos lasting less than 60 seconds), and should benefit immensely from landing the Sunday Ticket package from the National Football League over the next seven years. 

Alphabet is also benefiting from the rapid growth of cloud infrastructure service segment Google Cloud. Despite an exceptionally challenging environment for businesses of all sizes, Google Cloud reported 38% revenue growth during the third quarter from the prior-year period, and is approaching nearly $28 billion in annual run-rate revenue. That's good enough for a 9% share of global cloud infrastructure spending, based on the latest estimates from Canalys. 

Although this is a money-losing segment for Alphabet at the moment, cloud services have a tendency to generate considerably better margins than advertising. This operating segment has the potential to be a big-time winner for Alphabet by mid-decade, as well as offset ad-sales weakness in the short term.

Lastly, Alphabet is, arguably, the best value of the bunch among the FAANG stocks. As of the end of September, the company had $116.3 billion in cash, cash equivalents, and marketable securities, compared to just $14.7 billion in long-term debt. Having more than $101 billion in net cash has its perks. It allows Alphabet to buy back its own stock as a lift to shareholders, and it ensures the company can continue to innovate without any disruption.

Over the past five years, investors have willingly paid a multiple of close to 19 times cash flow to buy shares of Alphabet. But thanks to its virtual monopoly in internet search, as well as the rapid growth of its higher-margin ancillary operations, the company's operating cash flow can more than double over the next four years. Even if revenue stagnates in 2023, cash flow per share can still grow by a double-digit percentage.

Based on its current share price, investors can buy into the Alphabet growth story right now for roughly 6 times Wall Street's forecast cash flow for the company in 2026. It's arguably the best and safest deal among the FAANG stocks, which makes Alphabet the logical choice to outperform in 2023.