The companies that make up the FAANG acronym have undergone some name changes over the years, but their stocks led the market up until 2022. It's made up of the following:
- Facebook, now known as Meta Platforms (META -2.23%)
- Amazon (AMZN 0.89%)
- Apple (AAPL 3.29%)
- Netflix (NFLX -0.64%)
- Google parent Alphabet (GOOGL -2.92%) (GOOG -2.84%)
From 2013 to the start of 2022, these stocks smoked the market, with the worst performer handily beating the market.
| Stock | Performance |
|---|---|
| Meta Platforms | 1,160% |
| Amazon | 1,230% |
| Apple | 980% |
| Netflix | 4,450% |
| Alphabet | 719% |
| Nasdaq-100 | 578% |
| S&P 500 | 299% |
Data source: YCharts. Note: Returns are from Jan. 1, 2013, until Jan. 1, 2022.
Since 2022 began, this cohort hasn't fared nearly as well, with every stock except for Apple (still down 6.3%) underperforming the two major indexes. But, within this underperformance, I see two strong buying opportunities. Let's look at those two and how they can still deliver market-beating performance even with their size.
Some of the FAANG companies don't look attractive
Before tackling which ones I'd buy right now, let's look at the ones I'll take a pass on. First is the most stable of the five, Apple. Despite demand slowing for its products and its revenue falling year over year for the first time since 2019, the stock's valuation has remained elevated at 28 times earnings. With the stock priced for perfection and consumers not spending as much, I think it's wise to pass on Apple's stock.
Meta Platforms and Netflix are currently undergoing business transformations, which have caused their stocks to be near the bottom in terms of performance for FAANG companies. With Meta focusing more on the metaverse and Netflix attempting to monetize customers in new ways (like cracking down on password sharing), there's too much uncertainty for me to invest.
That leaves Alphabet and Amazon, which both look undervalued at this point.
Alphabet and Amazon are both priced at multiyear valuation lows
These companies haven't performed their best over the past year and a half, so the decline in their stock prices was warranted. However, each has a long-term growth catalyst that will boost their shares over the long term as their primary business returns to normal.
Cloud computing is this common theme, as Amazon Web Services (AWS) and Google Cloud are the largest and third-largest providers, respectively. With this industry expected to grow to $1.6 trillion by 2030 while only being valued at $217 billion at the end of September 2022, it's a massive growth opportunity in which few companies have a true foothold.
While cloud computing is each company's growth arm, getting their primary businesses on track will also provide a much-needed boost.
Alphabet is primarily an advertising company, with about 78% of fourth-quarter revenue coming from this source. This market has weakened thanks to a soft economic outlook. Advertising is known to be a cyclical industry, so once the economy recovers, its revenue will get back on track. However, it still needs to defend its market dominance, as Microsoft's Bing search engine could become the default software for Samsung phones thanks to its integration of ChatGPT.
With Alphabet's vast resources, I don't see this being a problem. But as the artificial intelligence arms race heats up, Alphabet must be on its A game.
To fulfill the e-commerce demand triggered by the COVID-19 pandemic, Amazon invested heavily in its distribution warehouse network. After consumers reverted to their in-person shopping habits, Amazon closed some of these locations and laid off employees due to overexpansion. This caused Amazon to become free-cash-flow (FCF) negative as it burned through cash.
Since reaching a low in mid-2022, Amazon has returned to producing FCF thanks to various efficiency initiatives. With its streamlining of resources, it's just a matter of time before Amazon's stock reflects its business gains.
With Amazon's stock trading at 2 times sales (its lowest valuation since 2015) and Alphabet trading at 23 times FCF (the lowest since 2014), both stocks look like solid bargains. Although they aren't without issues, I'm confident both stocks can beat the market over the next five years if they maintain their recovery path.
