Roughly two weeks ago marked one of the most important data releases of the quarter -- and no, I don't mean the monthly inflation report.
Following the end of a quarter, institutional money managers with at least $100 million in assets under management have 45 calendar days to file Form 13F with the Securities and Exchange Commission. A 13F is effectively a snapshot of the trades Wall Street's brightest and most-successful money managers made during the previous quarter (in this instance, the September-ended quarter).
The latest 13Fs are particularly intriguing with regard to the FAANG stocks.
Image source: Getty Images.
By "FAANG," I'm referring to:
- Facebook, which is now a subsidiary of Meta Platforms (META 0.47%)
- Amazon (AMZN 1.38%)
- Apple (AAPL 1.00%)
- Netflix (NFLX 0.59%)
- Google, which is now a subsidiary of Alphabet (GOOGL -0.12%) (GOOG -0.25%)
Wall Street's eyes are squarely on the FAANG stocks for two key reasons: they're industry leaders with sustained competitive advantages and/or moats, and they're outperformers.
All five of these businesses possess well-defined competitive edges:
- Meta owns four of the most-popular social media sites on the planet (Facebook, Instagram, WhatsApp, and Facebook Messenger) and its family of apps attracted nearly 4 billion unique monthly visitors during the third quarter.
- Amazon's online marketplace accounts for nearly 40% of U.S. online retail sales. Meanwhile, Amazon Web Services (AWS) is the world's leading cloud infrastructure service provider by market share.
- Apple's iPhone is responsible for more than half of all U.S. smartphone market share. It also sports the most robust share repurchase program of all publicly traded companies.
- Netflix is the undisputed leader in domestic and international streaming market share. Further, no streaming company comes close to its library of original shows and movies.
- Alphabet's Google is practically a monopoly in worldwide internet search. It's also the company behind Google Cloud, the global No. 3 cloud infrastructure service platform.
These sustained advantages are what have allowed the FAANGs to lead the stock market higher for much of the past decade. Therefore, knowing how billionaires are treating these stocks within their respective funds can be important.
Based on the latest round of 13Fs, billionaires absolutely piled into three FAANG stocks.
Amazon
Arguably the standout buy of the third quarter among the FAANGs was Amazon. A total of 10 billionaires piled into the authority in e-commerce, including (total shares purchased in parenthesis):
- Jeff Yass of Susquehanna International (5,042,696 shares)
- Ole Andreas Halvorsen of Viking Global investors (4,348,680 shares)
- Steven Cohen of Point72 Asset Management (1,171,081 shares)
- David Siegel and John Overdeck of Two Sigma Investments (883,205 shares)
- Ken Fisher of Fisher Asset Management (665,738 shares)
- David Tepper of Appaloosa Management (587,500 shares)
- Dan Loeb of Third Point (580,00 shares)
- Stephen Mandel of Lone Pine Capital (569,245 shares)
- Chase Coleman of Tiger Global Management (239,760 shares)
One of the likelier reasons for billionaires to be so bullish on Amazon is AWS. Despite its year-over-year growth tapering to 12% during the September-ended quarter, AWS still holds a remarkable 31% share of global cloud infrastructure service spending, based on a third-quarter estimate from Canalys. Since cloud margins are many multiples higher than the margins associated with online retail sales, AWS regularly accounts for the lion's share of Amazon's operating income.
Other high-margin ancillary operating segments may be fueling billionaire interest in Amazon as well. In particular, Amazon's advertising services segment has stood out as a top-performer in a challenging ad environment. Sales have grown by no less than 21% on a currency-neutral, year-over-year basis over the past two years. Since Amazon attracts more than 2 billion visitors to its site each month, it's a logical go-to for merchants. Ultimately, this is fueling the company's ad-pricing power.
Amazon's valuation is also historically inexpensive. Current expectations call for Amazon to more than triple its operating cash flow between 2022 and 2026. After closing out every year of the 2010s between 23 and 37 times its cash flow, investors have the opportunity to pick up shares right now for less than 13 times consensus estimated cash flow in 2024.
Apple
A second FAANG stock billionaires piled into during the third quarter is tech stock Apple. A total of six billionaires added to their funds' existing positions, including (total shares purchased in parenthesis):
- Jeff Yass of Susquehanna International (5,376,743 shares)
- Ken Griffin of Citadel Advisors (3,381,231 shares)
- Israel Englander of Millennium Management (1,833,484 shares)
- Ken Fisher of Fisher Asset Management (867,036 shares)
- David Siegel and John Overdeck of Two Sigma Investments (256,181 shares)
If you're wondering what drew a half-dozen billionaires to the largest publicly traded company in the U.S. by market cap, look no further than its innovation.
Since introducing a 5G-capable version of its iPhone during the fourth quarter of 2020, Apple has maintained roughly half of U.S. smartphone market share.
However, Apple isn't satisfied just being a products powerhouse. Although it's not abandoning the physical devices that brought it fame (iPhone, iPad, and Mac), it's steadily evolving into a platforms company. CEO Tim Cook is spearheading a transition that has Apple focused on subscription services. Subscriptions generate delectable margins and should help smooth out the company's sales fluctuations during major iPhone replacement cycles.
On the other hand, Apple is historically pricey. It's currently trading at 29 times fiscal 2024 earnings (Apple's fiscal 2024 will end on Sept. 28, 2024), which is at the upper bound of its historic forward-year earnings range.
What makes its valuation especially egregious is that Apple's sales declined in fiscal 2023 -- and that was with the help of above-average inflation as a tailwind. Given tepid demand at the moment for all of the company's physical products, a fair argument can be made that Apple isn't a good value.
Image source: Getty Images.
Alphabet
The third FAANG stock billionaires are absolutely piling into is Alphabet, the parent company of Google, streaming platform YouTube, and autonomous vehicle company Waymo, among others. All told, nine billionaire investors purchased shares of Alphabet's Class A stock (GOOGL) during the September-ended quarter, including (total shares bought in parenthesis):
- Stephen Mandel of Lone Pine Capital (3,113,001 shares)
- Bill Ackman of Pershing Square Capital Management (2,169,824 shares)
- Chase Coleman of Tiger Global Management (1,523,000 shares)
- Ken Griffin of Citadel Advisors (1,498,213 shares)
- David Siegel and John Overdeck of Two Sigma Investments (1,195,541 shares)
- Ken Fisher of Fisher Asset Management (1,023,535 shares)
- Israel Englander of Millennium Management (602,822 shares)
- Steven Cohen of Point72 Asset Management (544,495 shares)
The beauty of Alphabet's operating model, and the likely reason most of these nine billionaires are more than happy to scoop up shares, is its dominance in internet search. Google comprised 91.6% of global internet search share in October. What's more, Google hasn't held lower than a 90% share of worldwide monthly search since March 2015. Being the undisputed leader in internet search gives the company exceptional ad-pricing power.
Beyond this cash flow foundation, billionaires are probably enamored with Alphabet's burgeoning cloud operations. Google Cloud accounted for 10% of global cloud infrastructure service spend during the third quarter. More importantly, this segment has delivered three consecutive quarters of operating income following years of losses. The juicy margins associated with cloud services suggest Google Cloud could become a major generator of cash flow for Alphabet within the next couple of years.
Alphabet's valuation is the other key selling point that very likely enticed billionaires to buy. Shares can be purchased right now for approximately 14 times forward-year cash flow, which is notably lower than the multiple of 18 times cash flow Alphabet's Class A shares have traded at over the previous five years.
