When the going gets tough on Wall Street, investors often turn their attention to the FAANG stocks.
By FAANG, I'm referring to:
- Facebook, which is now a subsidiary of Meta Platforms (META 2.09%)
- Apple (AAPL 0.14%)
- Amazon (AMZN -0.21%)
- Netflix (NFLX 1.49%)
- Google, which is now a subsidiary of Alphabet (GOOGL 0.77%) (GOOG 0.71%)
The popularity of these five companies has to do with their consistent outperformance of the benchmark S&P 500, as well as their sustained competitive advantages.
Image source: Getty Images.
Whereas the S&P 500 has risen a cool 155% over the trailing 10-year period (through the closing bell on May 30, 2023), Netflix, Meta, Apple, Amazon, and Alphabet (Class A shares, GOOGL) are higher by approximately 1,180%, 1,030%, 1,020%, 816%, and 470%, respectively.
They're also clear-cut leaders within their respective industries. For instance, Meta Platforms owns four of the most-popular social media sites on the planet (Facebook, WhatsApp, Instagram, and Facebook Messenger). As for Amazon, it accounts for almost 40% of all online retail sales in the United States.
But it's not just everyday investors eyeing the FAANG stocks. Based on the latest round of Form 13F filings with the Securities and Exchange Commission, billionaire money managers were busy buying up, and even selling, certain FAANG stocks. In particular, two FAANGs were aggressively bought, while another was clearly avoided.
FAANG stock No. 1 billionaires are buying hand over fist: Netflix
The first FAANG that billionaire fund managers were eagerly scooping up shares of during the first quarter is streaming-service kingpin Netflix. Five prominent billionaires were buyers, including:
- Philippe Laffont of Coatue Management
- John Overdeck and David Siegel of Two Sigma Investments
- Jim Simons of Renaissance Technologies
- Israel Englander of Millennium Management
In the same order listed above, these billionaires acquired approximately 1.39 million shares, 711,700 shares, 622,100 shares, and 588,800 shares of Netflix stock.
The buzz surrounding Netflix likely has to do with the company's innovation. Even though competition has picked up considerably in the streaming space, Netflix remains the only streaming provider that's generating a recurring profit.
More importantly, the company has wised up about its audience and made strategic moves designed to boost total subscribers, grow revenue, and improve its operating cash flow. This includes clamping down on password-sharing, as well as introducing a less-costly ad-supported tier. According to the company, almost 5 million people have signed up for its ad-supported platform in the six months since it launched.
Furthermore, we're seeing discernible improvements in cash flow from Netflix. Following years of ongoing cash outflows tied to its international expansion, the company recorded close to $2.2 billion in free cash flow (FCF) during the first quarter. This strong showing, which comes on the heels of its ad-supported tier launch and phenomenal pricing power, allowed the company to increase its 2023 FCF forecast by $500 million to at least $3.5 billion.
But the continued knock against Netflix is that it's pricey. Investors today are paying close to 30 times Wall Street's consensus cash flow per share for the company in 2024. That's a lofty valuation for a company facing stiff competition from legacy media.
FAANG stock No. 2 billionaires are buying hand over fist: Alphabet
The second FAANG stock Wall Street billionaires simply can't get enough of is Alphabet, the parent of internet search engine Google and streaming platform YouTube, among other subsidiaries. A whopping seven billionaire money managers took the plunge during the first quarter, including:
- Dan Loeb of Third Point
- Philippe Laffont of Coatue Management
- Chase Coleman of Tiger Global Management
- Bill Ackman of Pershing Square Capital Management
- Steven Cohen of Point72 Asset Management
- Ray Dalio of Bridgewater Associates
- Israel Englander of Millennium Management
These seven billionaires purchased between 4.75 million shares (Third Point) and 1.56 million shares (Bridgewater and Millennium) of Alphabet Class A stock (GOOGL).
One reason billionaires absolutely adore Alphabet is the cash flow Google generates. For more than eight years, Google has accounted for between 90% and 93% of global internet search share. It's developed a seemingly impenetrable moat that, in most economic environments, affords the company exceptional ad-pricing bargaining power with businesses. Since periods of economic expansion tend to last substantially longer than recessions, ad-driven companies like Alphabet are sitting in the driver's seat.
YouTube is no slouch, either. It's the second most-visited social site in the world, behind only Facebook. Further, the introduction of Shorts -- short-form videos that are usually shorter than a minute -- is creating plenty of interest. In less than a year, the number of Shorts viewed daily grew from roughly 30 billion to north of 50 billion. This is a mammoth advertising opportunity for YouTube that the company is sure to capitalize on.
And don't forget about Google Cloud, the global No. 3 in terms of cloud service infrastructure spending. Enterprise cloud spending is arguably still in its very early innings, and Google Cloud reversed an operating loss into an operating profit in the latest quarter. Given the generally higher margins associated with the cloud, relative to advertising, there's a real chance Google Cloud can become a key source of cash flow for parent Alphabet by later this decade.
Image source: Apple.
The FAANG stock billionaire investors are avoiding like the plague: Apple
However, not all FAANG stocks were necessarily on billionaire investors' buy lists during the first quarter. Form 13Fs show that five billionaire investors were active sellers of tech stock Apple, including:
- Ken Fisher of Fisher Asset Management
- Jim Simons of Renaissance Technologies
- Ken Griffin of Citadel Advisors
- Israel Englander of Millennium Management
- Jeff Yass of Susquehanna International
As listed, these billionaire fund managers respectively disposed of approximately 7.52 million shares, 7.09 million shares, 5.12 million shares, 2.22 million shares, and 1.1 million shares of Apple stock.
To be clear, Apple is an amazing business. It's brought home close to $110 billion in operating cash flow over the trailing-12-month period, offers one of the largest nominal-dollar dividends in the world, has repurchased $586 billion of its common stock over the past decade, and is the clear-cut leader in U.S. smartphone market share.
But it's also a consumer-driven business that's struggling a bit. Through the first six months of fiscal 2023 (Apple's fiscal year ends in late September), Mac sales are down by 30% from the prior-year period, and iPhone revenue is down by $5.1 billion (about 4.2%). All PC makers have seen demand slow following the worst of the COVID-19 pandemic, which explains the weakness in Mac sales. Meanwhile, the iPhone 14 simply didn't offer enough differentiation from previous iterations to drive sustained sales growth.
Comparatively, services revenue hit a new record during the fiscal second quarter, but the rate of sales growth in services has slowed considerably in fiscal 2023.
Although Apple continues to be a cash cow, its valuation is a tough pill to swallow in a potentially weakening economic environment. Even with above-average inflation as a tailwind, sales are expected to decline 2.5% in fiscal 2023. Shares are also going for 30 times Wall Street's consensus earnings. That's a far cry from the price-to-earnings ratio of 10 to 15 Apple consistently traded between from the start of 2013 through 2018.
