For the better part of the past four years, Wall Street and investors have been taken on a roller-coaster ride. All three major stock indexes have oscillated between bear and bull markets in successive years, beginning in 2020.
When the going gets tough on Wall Street, the recipe for investors over the past decade has been to turn their attention to the FAANG stocks.
Image source: Getty Images.
When I say "FAANG," I'm talking about:
- Facebook, which is now a subsidiary of Meta Platforms (META 0.57%).
- Amazon (NASDAQ: AMZN).
- Apple (AAPL 2.20%).
- Netflix (NASDAQ: NFLX).
- Google, is which now a subsidiary of Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG).
Investors flock to the FAANG stocks during periods of heightened volatility for two reasons. To start with, these are industry leaders with sustained, competitive advantages.
- Meta Platforms closed out the third quarter drawing nearly 4 billion monthly active users (MAUs) with its top-notch social media "real estate."
- Amazon is the world's leading online marketplace and is also the global No. 1 in cloud-infrastructure service spending via Amazon Web Services (AWS).
- Apple's iPhone consistently accounts for more than half of U.S. domestic-smartphone share, and its capital-return program is second to none.
- Netflix is the domestic and international market-share leader when it comes to streaming services.
- Alphabet's Google is a virtual monopoly in global-internet search, with a nearly 92% share in October 2023. It's also behind Google Cloud, the world's No. 3 cloud-infrastructure service provider.
The other reason investors gravitate to the FAANG stocks during periods of instability is their historic outperformance of the broader market.
Whereas the benchmark S&P 500 has delivered an admirable 149% return over the trailing-10-year period, the worst-performing FAANG is Alphabet's Class A shares (GOOGL), which are higher by "only" 373%. On the other end of the spectrum, Apple, the world's largest publicly traded company by market cap, has sextupled the return of the S&P 500 over the trailing 10 years.
But as the famous investment saying goes, "past performance is no guarantee of future results."
While one high-flying FAANG stock stands out as a plain-as-day bargain in December, another perennial outperformer is rife with red flags.
The FAANG stock to buy hand over fist in December: Meta Platforms
Among the five accomplished businesses listed above, the one that's the best value of all is social media company Meta Platforms.
Before diving into the catalysts that can push Meta's market cap even higher, let's first examine the two headwinds that could weigh on its share price.
The biggest ongoing concern for Meta is the company's operating losses tied to its augmented- and virtual-reality segment Reality Labs. This pet project of CEO Mark Zuckerberg has lost nearly $11.5 billion through the first nine months of 2023, which is a little over $2 billion more than in the comparable period last year.
The other source of skepticism is the health of the U.S. economy. Even though U.S. gross domestic product is moving higher, and the unemployment rate is historically low, a basket of predictive indicators and money-based metrics signal trouble ahead. Meta generates over 98% of its net sales from advertising, and advertisers aren't shy about paring back their spending at the first sign of trouble for the U.S. economy. In other words, economic turbulence has the potential to hit Meta harder than the other FAANG stocks.
However, the economic cycle is a two-sided coin, and it's far from proportionate. Whereas nine out of 12 U.S. recessions since the end of World War II have ended in less than a year, most periods of expansion have lasted for multiple years, if not a full decade. These long-winded periods of expansion allow Meta to command exceptional pricing power for ad placement.
Something else that helps Meta succeed is its aforementioned "top-notch social media real estate." Collectively, Facebook, WhatsApp, Instagram, and Facebook Messenger are among the four most downloaded apps globally, and they attracted 3.96 billion MAUs during Q3. Furthermore, Threads reached 100 million users faster than any other social media app (five days) following its July launch.
Despite growing operating losses from Reality Labs, Meta has the ability to more than offset these losses with bountiful profits from its advertising operations. Meta has generated $51.7 billion in net cash from its operating activities through the first nine months of the current year, and it closed out September with more than $61 billion in cash, cash equivalents, and marketable securities. Meta's balance sheet and operating performance make it one of the few companies that has the luxury to take big risks. By the second half of the decade, Reality Labs could have Meta positioned to be a leading on-ramp to the metaverse.
As promised, Meta is also historically inexpensive. Even after more than tripling from its 2022 bear-market low, Meta is currently valued at less than 11 times forward-year cash flow, and its earnings per share (EPS) are forecast to nearly triple between 2022 and 2026. For context, Meta has traded at an average of almost 16 times year-end cash flow over the previous five years.
Image source: Apple.
The FAANG stock to avoid like the plague in December: Apple
Unfortunately, not every FAANG stock is worth buying at the moment. The one FAANG to consider avoiding like the plague in December is none other than the largest publicly traded company in the U.S. -- Apple.
Let me be clear that I'm not taking anything away from what Apple has accomplished in becoming the largest domestic public company. There's no denying that the iPhone is a juggernaut.
Likewise, CEO Tim Cook deserves credit for his leadership over the past 12 years. He's successfully overseeing the evolution of Apple from a physical products-focused company to one that'll rely on subscription services as its long-term foundation. Subscriptions tend to generate highly predictable sales and operating cash flow, which should help smooth out the revenue lumpiness that can occur during major iPhone upgrade cycles (e.g., moving from 4G LTE to 5G capability).
I'll also add that Apple is one of the most recognized and trusted brands in the world. Few companies command customer loyalty quite like it.
However, past performance is no guarantee of future results. Though Apple has a mammoth share-repurchase program in place, its operating performance has left a lot to be desired.
In Apple's fiscal 2023, which came to a close on Sept. 30, all of the company's physical products endured a sales decline. The company's iPhone sales dropped by $4.9 billion to $200.6 billion, while Mac sales plunged by more than a quarter from the prior-year period to $29.4 billion. The return to the office following the worst of the COVID-19 pandemic looks to be behind weaker Mac demand.
What makes this sales slump even more egregious is that it occurred with an above-average inflation rate. Even with a strong brand name and pricing power as tailwinds, Apple's net sales declined by $11 billion (2.8%) to $383.3 billion in fiscal 2023.
Earnings growth has stalled as well. Thanks to share repurchases, Apple was able to eke out an adjusted $0.02 per-share year-over-year improvement. But based solely on net income, Apple reported a $2.8 billion year-over-year decline in fiscal 2023.
Even with iPhone 15 expected to lift Apple's operating performance in fiscal 2024, shares of the company are currently trading at a historically high 27 times forward-year earnings. While this aggressive valuation could potentially be defended with a double-digit growth rate, Apple's growth engine has stalled.
The final issue is that rapidly rising interest rates -- the federal funds rate has jumped by 525 basis points since March 2022 -- have removed Apple's access to cheap capital. Though it's generating plenty of cash organically, Apple hasn't been shy about borrowing at historically low lending rates to fuel its aggressive share-repurchase program. A higher interest-rate environment may lead to fewer buybacks and weaker EPS growth for Apple.
