It's been a topsy-turvy start to the decade for Wall Street. The market's three major indexes have navigated their way through two bear markets (2020 and 2022) and a period of euphoria (2021), which saw the indexes touch multiple record-closing highs.
When volatility picks up on Wall Street, investors have a tendency to flock to time-tested outperformers. The preeminent FAANG stocks come to mind.
The "FAANG stocks" are comprised of:
- Facebook, which is now a subsidiary of Meta Platforms (META 0.43%)
- Apple (AAPL -0.35%)
- Amazon (AMZN 3.43%)
- Netflix (NFLX -0.63%)
- Google, which now a subsidiary of Alphabet (GOOGL 10.22%) (GOOG 9.96%)
Image source: Getty Images.
These are five companies that have vastly outpaced the benchmark S&P 500 over the trailing decade. Alphabet (Class A shares, GOOGL) is the worst-performer of the bunch, and it's more than tripled the return of the S&P 500 (523% vs. 172%, as of Sept. 5, 2023) over the trailing-10-year period.
Further, these are businesses that offer sustained competitive advantages.
- Meta Platforms owns the most attractive social media "real estate" on the planet. Facebook, Instagram, WhatsApp, and Facebook Messenger attracted nearly 3.9 billion monthly active users during the June-ended quarter.
- Apple is the clear-cut market share leader for smartphone sales in the United States. Additionally, its buyback program is unsurpassed -- approximately $600 billion in share repurchases since the start of 2013.
- Amazon accounts for nearly 40% of all U.S. online retail sales, according to eMarketer, and it operates the world's leading cloud infrastructure service (Amazon Web Services).
- Netflix holds the largest share of the streaming services market domestically and internationally.
- Alphabet's Google has held a 90% or greater share of the global internet search market for more than eight years.
In other words, there are good reasons for these five stocks to have outperformed for so long. However, their outlooks moving forward differ greatly. In the month of September, one FAANG stock remains remarkably inexpensive and has abundant catalysts in its corner, while another appears especially pricey in an uncertain environment.
The FAANG stock that's a surefire buy in September: Meta Platforms
Among the five FAANG stocks, the one that stands out as an amazing value for patient investors in September is social media company Meta Platforms.
Like every other publicly listed company, Meta has headwinds to contend with. Its biggest challenge is that a number of economic indicators and predictive tools suggest the U.S. economy could weaken in the quarters to come.
Meta generated more than 98% of its second-quarter revenue from advertising, and businesses tend to quickly pare back their ad spending at the first signs of trouble. In other words, fears about a weakening U.S. economy, or an actual weakening of U.S. gross domestic product, could really hit Meta's topline and bottom-line growth over the short run.
But this is a two-sided coin that undeniably favors optimists. Even though recessions are an inevitable part of the U.S. economic cycle, no recession after World War II has lasted longer than 18 months. By comparison, most periods of economic expansion have handily surpassed 18 months. The point being that Meta's core revenue driver (advertising) spends a disproportionate amount of time in a favorable environment.
As noted earlier, Meta's social media assets are something special. Although monthly active user growth has slowed, Facebook, Instagram, WhatsApp, and Facebook Messenger, are consistently among the most-downloaded apps in the world. Additionally, Threads made history by reaching 100 million users in a matter of days following its July launch. Merchants are well aware that their best chance to reach and target users is by advertising on Meta's social sites. This means plenty of ad-pricing power in Meta's corner.
Something else Meta has that few other social media platforms possess is the cash flow to take chances. The company closed out June with more than $53 billion in cash, cash equivalents, and marketable securities. It also generated $31.3 billion in net cash from its operating activities through the first six months of the current year.
Meta has taken a lot of heat for CEO Mark Zuckerberg's aggressive spending on metaverse products and various augmented/virtual reality applications. But with the company on pace to generate nearly $63 billion in net cash from operations this year, and sitting on $53.4 billion in cash, cash equivalents, and marketable securities, this is a risk Meta can afford to take. If successful, Meta should be a prime player in the rise of 3D virtual environments later this decade.
But the real eye-popper with Meta Platforms is its valuation. Despite its shares more than tripling since its 2022 bear market low, investors can buy Meta stock right now for 18X forward-year earnings and less than 11X Wall Street's forecast cash flow in the upcoming year. For context, Meta's forward-year price-to-earnings ratio is cheaper than the benchmark S&P 500, and its consensus forward-year price-to-cash-flow ratio is well below the nearly 16X multiple it averaged between 2018 and 2022.
Image source: Getty Images.
The FAANG stock that's worth avoiding in September: Netflix
However, not all of the FAANG stocks are necessarily worth buying. In September, streaming service giant Netflix is the company I'd suggest investors steer clear of.
Just as Meta has headwinds that could, in theory, send its share price lower, Netflix has catalysts that could move its valuation even higher. The one factor that's undeniably working in Netflix's favor is that it's the only pure-play streaming service that's generating a recurring profit. Though numerous legacy media companies have debuted streaming platforms, these segments tend to be sore spots on their quarterly reports. As for Netflix, it's on track to generate close to $12 in earnings per share this year, which works out to about $5.3 billion on an adjusted basis.
Netflix also has strength in numbers. Its more than 238 million global paying subscribers is tops among streaming services. Further, Netflix remains the top dog when it comes to original content. A study from BB Media in 2022, which was commissioned by Media Play News, found that Netflix accounted for 37% of the 8,877 original movie and show titles spanning 41 streaming platforms in the United States.
Yet there are also plenty of reasons to believe Netflix's stock could be stuck on rewind in the not-too-distant future.
Front-and-center is the ongoing strike by the Writers Guild of America and Screen Actors Guild-American Federation of Television and Radio Artists. The writers have been on strike for more than four months, with the screen actors joining the writers on strike on July 14. Though Netflix's library can provide some degree of protection from a short-lived strike, content creation is paramount to Netflix's success. Without a healthy original content pipeline, it could struggle to grow and retain paying members.
Another problem for Netflix is that its first-mover advantages in the streaming space are waning. While it still holds the highest streaming share in domestic and international markets, legacy media operators have proved more than willing to sacrifice near-term profits to land subscribers. Since many legacy media networks have well-recognized brands and deep pockets, they could prove formidable foes for streaming eyeballs and permanently slow Netflix's once-lofty growth rate.
The third issue for Netflix may be the toughest to overcome: its valuation. Despite raising its free cash flow forecast for the year, Netflix is the absolute priciest FAANG stock relative to its operating cash flow.
To be fair, the company's multiple relative to its cash flow has declined meaningfully from earlier this decade. Nevertheless, investors are paying 31X forward-year cash flow for a company that's seen its growth rate decelerate considerably. The risk-versus-reward simply doesn't make sense here for investors.
