Over multiple decades, Wall Street is a bona fide wealth creator. But as last year demonstrated, the stock market is completely unpredictable on a year-to-year basis.
When the going gets tough on Wall Street, investors often turn their attention to tried-and-true industry leaders. It's why the FAANG stocks have been such popular investments for more than a decade.
Image source: Getty Images.
When I say "FAANG" stocks, I'm talking about:
- Facebook, which is now a subsidiary of Meta Platforms (META -2.28%)
- Amazon (AMZN -1.35%)
- Apple (AAPL -2.19%)
- Netflix (NFLX -2.52%)
- Google, which is now a subsidiary of Alphabet (GOOGL -1.82%) (GOOG -1.80%)
Among the many reasons investors gravitate to the FAANGs is their clear-cut competitive advantages. For instance, Meta owns four of the most-popular social media sites on the planet, whereas Amazon was expected to bring in nearly 40% of all U.S. online retail sales in 2022, according to a report from eMarketer. These are dominant businesses within their respective industries -- and investors know it.
But even among the FAANG stocks, there's a hierarchy of opportunity. In other words, some offer more long-term upside potential than others. Among Meta, Amazon, Apple, Netflix, and Alphabet, there are two FAANG stocks that have the potential to double your money by 2027.
FAANG stock No. 1 that can double your money by 2027: Alphabet
The first FAANG stock fully capable of producing a 100% return over the next five years is Alphabet, the parent company of internet search engine Google, autonomous vehicle company Waymo, and streaming platform YouTube.
If investors were to solely focus on Alphabet's fourth-quarter operating results, which were released last week, they'd have a hard time believing this company is capable of doubling in value by 2027. Total revenue jumped by just 1% over the prior-year quarter, with ad revenue pretty much declining across the board (Google and YouTube). Ad spending weakness is not uncommon when the winds of recession begin blowing.
However, one quarter certainly doesn't tell the tale when it comes to Alphabet. On a macro basis, investors should recognize the numbers game that very much favors ad-dependent companies. Even though ad spending weakens during economic contractions and recessions, these downturns tend to be short lived. By comparison, the U.S. and global economy can spend years expanding. This means Alphabet's ad-driven operating segments are growing in lockstep with the U.S. and global economy over time.
But it's not just macroeconomic factors working in Alphabet's favor. In terms of global search engine market share, Google is practically a monopoly. According to data provided by GlobalStats, Google has accounted for 91% or greater of worldwide internet search share since December 2018. Having roughly 90 percentage points more market share than the next-closest competitor helps Alphabet's ad-pricing power immensely.
Although Google should remain Alphabet's primary cash-flow driver for the foreseeable future, the company is investing in numerous other verticals and channels to boost its revenue and, eventually, its profits. As an example, Alphabet is investing heavily in monetizing YouTube Shorts -- short-form videos lasting less than a minute. The company noted during its fourth-quarter conference call that over 50 billion YouTube Shorts are being watched daily, which is a huge audience for advertisers to reach. For context, this figure stood at 30 billion daily views during the first quarter of 2022.
Significant investments are also being made in cloud infrastructure service Google Cloud, which climbed to an estimated 9% of worldwide cloud infrastructure spending during the third quarter, based on a report by Canalys. While Google Cloud is still a money-losing segment for Alphabet, enterprise cloud spending is still very much in its infancy. Since the margins associated with cloud services are typically higher than advertising margins, Google Cloud has an opportunity to become a key cash-flow driver by the second half of this decade.
Alphabet is also relatively inexpensive, given its sustained double-digit growth rates during periods of economic expansion. It's valued at 20 times Wall Street's consensus earnings for 2023, and the company closed out 2022 with just over $99 billion in net cash, cash equivalents, and marketable securities on its balance sheet. If earnings per share were to double between now and 2027 (which seems quite likely), Alphabet stock shouldn't have any trouble returning 100% for patient investors.
Image source: Amazon.
FAANG stock No. 2 that can double your money by 2027: Amazon
The second FAANG stock with all the tools and intangibles needed to double your money by 2027 is e-commerce juggernaut Amazon.
Similar to Alphabet, if investors were solely to focus on Amazon's operating performance during the fourth quarter, they'd be missing the big picture. Though Amazon's retail segment struggled mightily and the company's net income plunged 98% from the prior-year period, Amazon's high-margin operating segments are still unstoppable.
When most people hear the Amazon name, they immediately think about the company's online marketplace, which accounts for more U.S. online retail market share than its next 14 closest competitors on a combined basis. But the thing about online retail sales is that it's a generally low-margin operating segment. While Amazon's online marketplace has done a phenomenal job of attracting a loyal customer base, it's ultimately not the operating segment that'll push Amazon stock to new heights. Rather, it's a trio of ancillary divisions that generate most of its Amazon's cash flow and operating income.
The first of these three key segments is subscription services. The popularity of its e-commerce platform encouraged more than 200 million people worldwide to sign up for a Prime membership. Keep in mind that this "200 million" figure is a company number from April 2021. Between very modest online sales growth since April 2021 and landing distribution exclusivity for the NFL's Thursday Night Football, the number of Prime members has assuredly grown. Amazon is nearing $37 billion in annual run-rate sales from subscription services.
The second higher-margin segment fueling Amazon's growth is advertising services. Having more people view its ever-growing library of content, as well as visit its online marketplace, provides Amazon with abundant pricing power when negotiating with merchants. Despite a difficult environment for ad spending, Amazon recognized 23% year-over-year advertising services sales growth in the fourth quarter (excluding currency movements).
Finally, there's cloud service infrastructure segment Amazon Web Services (AWS). The aforementioned Canalys report estimates AWS accounted for 32% of worldwide cloud service spending in the September-ended quarter. Despite representing only 15.6% of Amazon's net sales in 2022, AWS delivered $22.8 billion in operating income. Every other segment combined for Amazon generated an operating loss of $10.6 billion. AWS is, unquestionably, Amazon's cash-flow and profit driver.
Although Amazon is quite pricey when looking at the price-to-earnings ratio, cash flow is the more appropriate measure of value for this company. Since Amazon reinvests a significant portion of its cash flow back into its various channels, it's a far better measure of the company's health and value.
Throughout the 2010s, Amazon was valued at a median of 30 times its year-end cash flow. Based on Wall Street's consensus, Amazon is currently trading at just 5.6 times forecast cash flow in 2027. That's an incredible deal for a company whose highest-margin operating segments are all still growing by a double-digit percentage.
