When it comes to Wall Street's perennial outperformers, the FAANG stocks are truly in a class of their own.
When I say "FAANG," I'm referring to the acronym for:
- Facebook, which is a subsidiary of Meta Platforms (META 0.40%)
- Apple (AAPL -0.29%)
- Amazon (AMZN 0.91%)
- Netflix (NFLX -0.47%)
- Google, which is a subsidiary of Alphabet (GOOGL 0.89%) (GOOG 0.86%)
The reason the FAANGs are so popular is their long-term outperformance. Whereas the benchmark S&P 500 has delivered a very respectable 161% return over the trailing-10-year period, as of June 8, 2023, Netflix, Apple, Meta, Amazon, and Google (Class A shares, GOOGL), have, in this same order, returned around 1,200%, 1,040%, 1,040%, 800%, and 460%. In short, they've run circles around Wall Street.
Image source: Getty Images.
They're also a big reason the S&P 500 is now in a bull market. But even though this group, collectively, is printing money for long-term investors, the FAANG stocks aren't created equally. When analyzed using the price-to-cash-flow ratio, there's a big difference.
Ranking the FAANGs from cheapest to most expensive
Although the price-to-earnings (P/E) ratio is the most-commonly used valuation measure on Wall Street, the FAANG stocks have a tendency to reinvest most or all of their operating cash flow. This makes cash flow the best measure of relative cheapness/priciness when it comes to the FAANGs.
With this being said, here are the FAANG stocks ranked from cheapest to priciest using the most-relevant valuation metric: the price-to-cash-flow ratio.
1. Meta Platforms: 10.1 times forward-year (2024) cash flow
Based on the forward-year price-to-cash-flow ratio, social media stock Meta Platforms is the cheapest FAANG stock. That might be hard to believe given its sizable run-up from its 2022 lows, but shares are currently trading for just a hair about 10 times Wall Street's consensus cash flow for next year.
The thing investors have to understand about Meta Platforms is that CEO Mark Zuckerberg has levers he and his board can pull to create value for shareholders. Though Zuckerberg is intent to spend big bucks on metaverse innovations, growing losses from Reality Labs (the company's metaverse division), as well as a weaker ad spending environment, ultimately led Meta to pare back the midpoint of its forecast capital expenditures in 2023 by $5 billion. That's not chump change, and it can really move the cash-flow needle.
Additionally, Meta still possesses the most-valuable social media real estate. Its four key assets -- Facebook, WhatsApp, Instagram, and Facebook Messenger -- lured more than 3.8 billion unique visitors each month to its family of apps during the March-ended quarter. More often than not, Meta is going to enjoy exceptionally strong ad-pricing power.
2. Amazon: 12.7 times forward-year cash flow
Two words you may have thought you'd never see in the same sentence are "Amazon" and "cheap." But based on Wall Street's forward-year cash-flow multiple of less than 13, Amazon is historically inexpensive. By comparison, Amazon ended every year of the 2010s at a price-to-cash-flow multiple of 23 to 37.
Despite being the world's top online retail marketplace, it's Amazon's ancillary operations that do virtually all of the heavy lifting on the cash-generation front. Specifically, cloud infrastructure service segment Amazon Web Services (AWS) is Amazon's most-important operating segment.
According to tech analysis company Canalys, AWS accounted for 32% of global cloud service spending during the first quarter. Since cloud service margins are considerably higher than online retail margins, AWS has consistently accounted for 50% to 100% of Amazon's operating income despite contributing just a sixth of net sales.
As long as AWS, subscription services, and advertising services continue growing by a double-digit percentage, Amazon should be a cash cow.
Image source: Getty Images.
3. Alphabet: 13.5 times forward-year cash flow
Another FAANG stock that's historically much cheaper than it was throughout the 2010s is Alphabet, the parent company of internet search engine Google, streaming platform YouTube, and autonomous vehicle company Waymo. After averaging a price-to-cash-flow ratio of 18.3 over the past five years, Class A shares can be scooped up right now for only 13.5 times forecast cash flow in 2024.
Internet search Google continues to be Alphabet's foundation. You'd have to go back to the first quarter of 2015 to find the last time Google didn't account for at least 90% of worldwide search share in a given month. Being a veritable monopoly in search gives the company phenomenal ad-pricing power, as well as allows it to benefit from the long-term growth in the U.S. and global economy.
Alphabet's ancillary operations can become cash cows, too. More than 50 billion YouTube Shorts are now being watched daily, which is a mammoth advertising opportunity for the company. Meanwhile, Google Cloud holds 9% of the global cloud infrastructure service market, and more importantly reversed a year-ago loss into a profit in the March-ended quarter.
4. Apple: 22.7 times forward-year cash flow
On the other end of the spectrum is tech stock Apple, which isn't particularly cheap. After consistently ending the year at a price-to-cash-flow multiple of between 7.5 and 13.9 from 2013 through 2018, investors are now paying close to 23 times forward-year cash flow for the largest publicly traded company in the U.S.
In one respect, Apple deserves a premium given what it offers long-term investors. It's, arguably, the most-valuable brand in the world, it has an exceptional loyal customer base, and its 5G smartphones sell like hotcakes. To boot, it's repurchased approximately $586 billion worth of its common stock over the trailing 10 years.
The issue with Apple is that it's been valued as a growth stock for much of the past 10 years -- and it's not growing at the moment. Even with historically high inflation as a tailwind, net sales are expected to fall in fiscal 2023, with Mac revenue down 30% through six months and iPhone sales $5.1 billion below where things stood last year. Without its typical double-digit growth rate, Apple has lost its luster.
5. Netflix: 30.1 times forward-year cash flow
Bringing up the caboose in the valuation department among the FAANG stocks is streaming service leader Netflix. Despite, technically, being cheaper than in years' past, Netflix clocks in with a pricey multiple to cash flow of just over 30.
The reason Netflix is so pricey primarily has to do with the company's international expansion efforts. The desire to secure a dominant share of overseas streaming coerced Netflix's management team to spend at-will for years. Even though the company is quite profitable on an adjusted basis, and Netflix increased its free cash flow forecast by $500 million for 2023, its operating cash flow relative to its market cap is still playing catch-up.
The other concern for Netflix, compared to the likes of Meta, Amazon, Alphabet, and Apple, is that its moat isn't too strong. Netflix has been consistently losing streaming market share since the start of the decade as legacy operators build up their direct-to-consumer offerings. While Netflix has maintained an advantage as the only profitable large-scale streaming operator, legacy media stocks are flush with cash and not going away.
At 30 times forward-year cash flow, Netflix is the FAANG for investors to consider avoiding.
