All five of the FAANG stocks -- Facebook's parent company Meta Platforms, Apple, Amazon, Netflix, and Google's parent Alphabet (GOOG 1.19%) (GOOGL 1.25%) -- hit their all-time highs in 2021 and early 2022. But all five stocks have subsequently pulled back, with Apple suffering the mildest decline, as rising interest rates pummeled the tech sector.
I believe all five FAANG stocks will rise over the long term since they dominate their respective industries and have plenty of cash. However, I expect Alphabet to pull ahead of its peers in the second half of 2023 and beyond, for four simple reasons.
Image source: Getty Images.
1. Alphabet's ecosystem is inescapable
The bears believe that new "generative AI" chatbots like OpenAI's ChatGPT will disrupt traditional online search engines like Google. But Google already has its own generative AI chatbot, Bard, and its sprawling ecosystem is nearly inescapable.
Google is still the world's top search engine, YouTube is the largest streaming video service with over 2.6 billion monthly users, Gmail is the leading web-based email platform with nearly 2 billion active users, Chrome controls about two-thirds of the web browser market, and Android is the most popular mobile operating system. Google Cloud is also the third-largest cloud infrastructure platform after Amazon Web Services (AWS) and Microsoft Azure.
Google and Meta also control a near-duopoly in the global digital ad market. Yet Google hasn't been as heavily affected by Apple's iOS update, which allows its users to opt out of data-tracking features, as Meta. That's because Google's sprawling ecosystem doesn't rely as much on third-party data as Meta's Facebook and Instagram.
2. Alphabet generates stable long-term growth
Alphabet's growth engines aren't immune to the recent macroeconomic headwinds, but it's still generating impressive gains for patient investors. Between 2012 and 2022, its annual revenue and net income both rose at a compound annual growth rate (CAGR) of 19%, even as it endured financial crises in Europe and Latin America, the COVID-19 pandemic, and the recent spike in interest rates. Over the past decade, its stock has rallied more than 400% as the Nasdaq Composite rose about 270%.
Past gains don't guarantee future returns, but Google's advertising and cloud businesses (which accounted for 89% of its revenue in 2022) will likely continue to generate stable growth after the near-term macro headwinds dissipate. The global digital advertising market could still grow at a CAGR of 14.7% from 2022 to 2027, according to Research and Markets, while Grand View Research expects the global cloud computing market to expand at a CAGR of 14.1% from 2023 and 2030.
Alphabet has the economies of scale to thrive in both competitive markets. Between 2022 and 2025, analysts expect its revenue to grow at a CAGR of 10% as its net income rises at a CAGR of 14%. We should take those estimates with a grain of salt, but they suggest it will easily overcome the recent slowdown in ad and cloud spending.
3. Alphabet is the cheapest FAANG stock
Alphabet's stock price is down by more than 30% after hitting its all-time high in November 2021. But after that drop, the stock trades at just 20 times forward earnings.
By comparison, Meta, Apple, Amazon, and Netflix trade at forward multiples of 21, 27, 59, and 28, respectively. That makes it the cheapest FAANG stock -- so it could have more upside potential than its peers once a new bull market starts.
4. Alphabet has plenty of cash
Alphabet ended 2022 with $114 billion in cash, cash equivalents, and marketable securities, and it generated $60 billion in free cash flow for the full year. That liquidity makes it a safe stock to hold if interest rates continue to rise.
That mountain of cash also gives it plenty of room to make new investments, acquire smaller companies to expand its ecosystem, repurchase more shares (it already bought back $59 billion in shares in 2022), and even potentially pay a dividend. Therefore, it's still far too early to dismiss Alphabet as an also-ran that has lost its momentum.
Alphabet is still a solid long-term investment
Over the past year, investors have fretted over Alphabet's slowing growth, abrupt layoffs, and uninspiring moves in the generative AI space. But over the long term, it will likely remain one of the world's most dominant tech companies -- and its massive ecosystem will continue to lock in more advertisers, cloud customers, and consumers. That evergreen strategy, along with its low valuation, make it my top FAANG stock to buy this year.
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