All five FAANG stocks have fallen sharply in response to recession fears, but two stand out from the pack. Amazon (AMZN -0.40%) and Netflix (NFLX 0.57%) saw their share prices tumble 47% and 48%, respectively, from all-time highs. Neither stock has fallen more sharply at any point in last 10 years (aside from the current bear market), but the future still looks promising for both businesses. That means investors have a once-in-a-decade buying opportunity.
Here's why shares of Amazon and Netflix are worth owning.
1. Amazon
Amazon got rocked by high inflation last year. Revenue growth slowed as business and consumer spending softened, and operating expenses soared as the rising cost of fuel and electricity put pressure on its logistics network and data center footprint. Those headwinds led to an underwhelming financial performance. Full-year revenue increased 9% to $514 billion and cash from operating activities rose just 1% to $46.8 billion.
However, investors need to ignore the temporary economic headwinds and focus on the big picture. The investment thesis remains rock solid. First, Amazon operates the most popular online marketplace in the world as measured by monthly visitors, and its brand is synonymous with e-commerce. Second, Amazon Web Services is the innovation leader in cloud computing, and it holds more market share than Microsoft Azure and Alphabet's Google Cloud combined. Third, Amazon is the fourth-largest digital advertiser in the world, and the company is taking market share from the leaders, Alphabet and Meta Platforms.
In a nutshell, Amazon is a major player in the three large and growing markets. In fact, according to forecasts from industry analysts, retail e-commerce sales will increase by 13% annually through 2030, cloud computing spend will increase by 16% annually through 2030, and digital advertising spend will increase by 9% annually through 2030.
Shareholders have good reason to believe Amazon can grow revenue at a double-digit pace (perhaps as high as 15%) through the end of the decade. That makes its current valuation of 2 times sales look relatively inexpensive, and it's certainly a bargain compared to the five-year average of 3.7 times sales. That's why this FAANG stock is a buy.
2. Netflix
Netflix got off to a bad start last year. In the first quarter, the streaming giant reported its first subscriber loss in more than a decade, as high inflation and password sharing created disincentives for would-be members. Netflix also struggled with unfavorable foreign exchange rates as the U.S. dollar strengthened throughout the year. Taken together, those headwinds led to underwhelming financial results. Revenue increased just 6% to $31.6 billion in 2022, and earnings fell 11% to $9.95 per diluted share.
On the bright side, Netflix generated positive free cash flow (FCF) of $1.6 billion, and management expects FCF to reach $3 billion in 2023. The company also gave investors two more reasons to be optimistic. First, its ad-supported streaming service that launched in November is already reenergizing subscriber growth. Paid memberships increased by 4% to 230.7 million in the fourth quarter. Second, Netflix has a plan to crack down on password sharing, a problem that currently allows an estimated 100 million households to access content without paying. The company is mid-launch on a paid sharing product to help monetize those viewers.
More broadly, Netflix is the gold standard in streaming entertainment. It leads the industry in engagement, revenue, and profits, and its ability to churn out viral content far surpasses most of its peers. According to Parrot Analytics, Netflix accounted for 41.5% of original content demand in 2022, more than the next five rivals combined. The company also produced 13 of the top 15 original streaming series last year.
Here's the upshot: Netflix benefits from a virtually unassailable moat. Its brand is synonymous with streaming, and the company is engaging viewers more effectively than its peers. That should draw more subscribers to Netflix in the coming years, but it also positions the company as a valuable advertising partner for brands.
On that note, Netflix has plenty of room to grow its business. Consumers spend about $300 billion on pay TV and streaming content each year, while brands spend $180 billion on TV advertising. That puts Netflix in front of a $480 billion addressable market. With that in mind, shares currently trade at 5.1 times sales, a discount to the five-year average of 8.4 times sales and a reasonable price to pay given the potential upside. Now is a good time for investors to buy a small position in this growth stock.