Though volatility is inherent on Wall Street, things have been especially erratic over the past four years. The COVID-19 crash, 2022 bear market, and investment euphoria of 2021 all whipsawed equities.
When uncertainty becomes the norm, both professional and everyday investors tend to seek out the safety of companies that offer a history of outperformance. For the past decade, it's the FAANG stocks that have fit the bill.
Image source: Getty Images.
When I say "FAANG," I'm referring to:
- 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 is now a subsidiary of Alphabet (GOOGL 10.22%) (GOOG 9.96%)
On top of running circles around the benchmark S&P 500 over the trailing decade, the FAANG stocks bring clearly identifiable, and often sustainable, competitive advantages to the table. For example:
- Meta Platforms is the world's leading social media platform and is responsible for drawing in nearly 4 billion unique users each month.
- Apple is the dominant force in the U.S. smartphone arena. It also has the top capital-return program among publicly traded companies -- more than $600 billion in common-stock purchases since the start of 2013.
- Amazon is the world's premier online marketplace and accounts for roughly $0.40 of every $1 spent in online retail sales in the United States.
- Netflix is the domestic and international share leader in streaming services. No streaming company comes remotely close to the sheer amount of original programming Netflix has produced.
- Alphabet's internet search engine Google is a virtual monopoly. It was responsible for almost 92% of global search share in November.
The fact that these are industry-leading businesses with potentially sustainable advantages isn't lost on Wall Street or its analysts. As we prepare to open the curtain on 2024, three of these FAANG stocks offer between 30% and 53% upside, according to a trio of Wall Street analysts.
Alphabet: Implied upside of 36%
The first FAANG stock that could be putting a smile on the faces of its shareholders in 2024 is Alphabet, the parent company of Google, autonomous vehicle company Waymo, and streaming platform YouTube.
According to analyst Ross Sandler of Barclays, shares of this trillion-dollar behemoth can reach $180 in the new year. This would represent upside of 36%, relative to where Alphabet's Class A shares (GOOGL) closed on Dec. 15.
As noted, Alphabet's most front-and-center advantage is its leading search engine. Based on data from GlobalStats, it's been more than eight years since Google accounted for less than a 90% share of worldwide internet search. This makes it the unquestioned go-to for advertisers looking to target consumers.
But what investors may be overlooking is Alphabet's substantially higher margin ancillary segments, which are positioned to drive its future growth. For instance, YouTube is the second most-visited social site behind Facebook. Daily views of short-form videos, known as Shorts, have soared from 6.5 billion in 2021 to more than 50 billion this year. YouTube should have no trouble commanding significant ad-pricing power.
Perhaps even more exciting is what's happened with Google Cloud. Estimates from tech analysis company Canalys show that Google Cloud comprised 10% of worldwide cloud infrastructure service spend during the third quarter. Following years of losses, Google Cloud has delivered three consecutive quarters of operating profit. Since cloud margins are substantially higher than advertising margins, the expectation is that Google Cloud will lead Alphabet's cash flow meaningfully higher as the decade wears on.
There's also an enticing value proposition with Alphabet. Shares can currently be purchased for 13.7 times forward-year cash flow, a clear discount to its average multiple of closer to 18 times cash flow over the previous five-year period.
Meta Platforms: Implied upside of 30%
A second FAANG stock that offers significant upside in the new year is Meta Platforms, the parent of Facebook, Instagram, WhatsApp, and Threads, among other social-themed sites.
The bull among all other optimists on Wall Street is analyst Ivan Feinseth of Tigress Financial. Feinseth believes Meta's shares can reach $435 in 2024. After more than tripling from their 2022 bear market low, Meta's shares could propel another 30% higher if Feinseth is correct.
Since Meta generates more than 98% of its revenue from advertising, there had been some fear that ad spending would weaken due to recessionary concerns. Thankfully, history is working in the company's favor.
Recessions tend to be short-lived, with none of the 12 downturns in the U.S. economy since World War II lasting longer than 18 months. By comparison, most periods of expansion are measured in multiple years, with some even lasting a decade. Ad-driven businesses like Meta Platforms are geared for long-term success.
It also doesn't hurt that Meta Platforms' family of apps attracted 3.96 billion monthly active users in the September-ended quarter. Advertisers are well aware that no other social media company gives them access to more eyeballs than Meta. That's good news for the company's ad-pricing power.
Meta's cash flow and balance sheet represent additional reasons the company could feasibly reach Feinseth's lofty price target. It ended the third quarter with $61.1 billion in cash, cash equivalents, and marketable securities, as well as generated $51.7 billion in net cash from operations through the first nine months of 2023. A cash-rich balance sheet gives Meta and CEO Mark Zuckerberg the luxury of taking risks, which includes spending billions of dollars each quarter on metaverse and augmented/virtual reality innovations.
Image source: Amazon.
Amazon: Implied upside of 53%
The third FAANG stock that offers abundant upside in 2024, at least according to one Wall Street analyst, is e-commerce leader Amazon. Redburn Atlantic's Alex Haissl foresees shares of Amazon climbing to $230 in the new year, which would be 53% above where the company's stock closed on Dec. 15.
Similar to Meta, shares of Amazon have been held back by the expectation of a U.S. recession taking place. Amazon's top revenue segment is its online marketplace. When downturns occur in the U.S. economy, it's perfectly normal for consumers and businesses to spend less.
But there's a very big difference between where Amazon collects its revenue and where it generates most of its operating income and cash flow. Although its e-commerce marketplace is the face of the company, it's ultimately a low-margin operating segment. Amazon brings in the lion's share of its cash flow from a couple of its ancillary operating divisions.
Nothing is more important than Amazon Web Services (AWS), which accounted for an astonishing 31% of worldwide cloud infrastructure service spending during the third quarter, per Canalys. Enterprise cloud spending is still ramping up, which means a sustained double-digit growth opportunity likely awaits AWS. Despite accounting for just a sixth of Amazon's net sales, AWS regularly contributes 50% to 100% of Amazon's operating income.
Don't overlook Amazon's subscription services, either. The company surpassed 200 million global Prime subscribers in April 2021 and has almost certainly added to this figure since. The e-commerce marketplace continues to grow in popularity, and Amazon is now the exclusive home of Thursday Night Football.
To somewhat keep with this theme, Amazon is relatively inexpensive. Throughout the 2010s, it closed out each year at a multiple of 23 to 37 times its operating cash flow. Investors can purchase shares of Amazon right now for roughly 13 times forward-year cash flow. That's the cheapest this online juggernaut has ever traded, relative to its future cash flow.
