Over multidecade periods, Wall Street has proved to be a bona fide wealth-creating machine. But over shorter timelines, such as a few months or a couple of years, directional moves in the major stock indexes can be unpredictable.
For the past decade, when the going has gotten tough on Wall Street, investors have turned to the time-tested FAANG stocks.
By "FAANG," I'm talking about:
- 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%)
Image source: Getty Images.
Aside from absolutely crushing the broader market in the return department over the trailing decade, these five companies dominate their respective industries.
- Meta Platforms owns some of the top social media "real estate" on the planet and attracted nearly 4 billion active users to its sites each month during the September-ended quarter.
- Apple's iPhone accounts for better than 50% of U.S. smartphone market share. Meanwhile, its share repurchase program over the past decade is unmatched by any public company.
- Nearly 40% of U.S. online retail sales in 2022 can be traced to Amazon's online marketplace. Amazon Web Services (AWS) is also the world's top cloud infrastructure service provider by spending.
- Netflix is both the domestic and international market share leader in streaming services. Further, no streaming company comes close to matching its library of original content.
- Alphabet's Google is pretty much a monopoly, with almost a 92% share of worldwide internet search in December.
However, the outlook for the FAANGs could differ dramatically in the new year. While two of these outperformers remain historically inexpensive and are ripe for the picking, another industry leader has seen its growth engine stall.
FAANG stock No. 1 to buy hand over fist in 2024: Meta Platforms
Despite shares nearly tripling in 2023, social media stock Meta Platforms stands out as a clear-cut value play in the new year (and beyond).
Arguably, the biggest risk for Meta is the possibility of the U.S. falling into a recession in 2024. A couple of money-focused metrics and forecasting tools with exemplary track records do suggest a challenging year lies ahead. Since Meta generates more than 98% of its revenue from advertising and businesses are typically quick to pare back their ad spending in a weakening economy, this would be bad news for the company.
The thing about recessions that's often overlooked is just how short-lived they typically are. Nine of the 12 recessions following World War II haven't lasted a year, while none of the remaining three made it past 18 months. By comparison, there have been two economic expansions that endured at least a full decade since 1945. More often than not, ad-driven companies are enjoying a favorable economic climate.
What really puts the ball in Meta's court is its aforementioned social media real estate. Facebook is the most-visited social site globally, while Instagram, WhatsApp, and Facebook Messenger are, collectively, among the most-downloaded apps worldwide. In spite of seemingly endless competition, Meta's social media apps continue to shine and draw in a greater number of monthly active users. That's great news for its ad-pricing power.
Investors should also consider that Meta's mammoth operating cash flow and cash-rich balance sheet give it the luxury of investing in high-growth initiatives. Though its augmented/virtual reality segment, Reality Labs, has lost nearly $11.5 billion through the first nine months of 2023, its family of apps has generated $41.8 billion in profit. Meta is also sitting on more than $61 billion in cash, cash equivalents, and marketable securities. CEO Mark Zuckerberg can make investments for the future without hurting his company's bread-and-butter operating segment.
Lastly, Meta Platforms remains historically cheap after its big run-up. Shares can be purchased for 11.8 times forward-year cash flow, which is 25% below Meta's average multiple to cash flow over the trailing five years.
FAANG stock No. 2 to buy hand over fist in 2024: Alphabet
The other FAANG stock investors can confidently buy hand over fist in 2024 is Alphabet, the parent of internet search engine Google, streaming platform YouTube, and autonomous vehicle company Waymo, among other ventures.
Not to sound like a broken record, but Alphabet shares the same biggest concern as Meta Platforms: a potential slowdown in advertising. Alphabet brought in about 78% of its revenue during the third quarter from advertising. If the U.S. economy slows down in the new year, it's probable that businesses would taper their ad spending -- at least in the short run.
What Alphabet has working in its favor is its practical monopoly status in global internet search. According to monthly search share data provided by GlobalStats, the last time Google closed out a month with less than a 90% share of worldwide internet search was March 2015. It's the undisputed go-to for businesses wanting to reach consumers, which should propel strong ad-pricing power for parent company Alphabet.
However, it's the company's ancillary operating segments that represent its most-intriguing growth prospects in 2024 (and beyond). In particular, cloud infrastructure service provider Google Cloud has turned the corner to recurring profitability. Enterprise cloud spending has a long growth runway, and Google Cloud has gobbled up a 10% share of worldwide cloud infrastructure service spending, as of the September-ended quarter.
YouTube is no slouch, either. It's attracting over 2.7 billion monthly active users, which trails only Facebook, and has seen daily views of Shorts (short-form videos that typically last less than a minute) shoot past 50 billion. Both premium subscriptions and advertising demand should increase in the new year.
Best of all, Alphabet remains inexpensive. Shares can be purchased for 14.4 times forward-year cash flow to begin 2024. That's a notable discount to its average cash flow multiple of 18 over the previous five years.
Image source: Apple.
The FAANG stock to avoid like the plague in the new year: Apple
Unfortunately, not every FAANG stock is poised to be a winner in 2024. Although tech stock Apple has been one of the top-performing stocks in the S&P 500 over the past 20 years, it's not a company I'd suggest putting money to work in this year.
Don't get me wrong -- Apple is a pretty phenomenal business. As noted, it accounts for half or more of U.S. smartphone market share. Further, CEO Tim Cook is overseeing the evolution of Apple into a platforms-focused company. An operating model that emphasizes subscription services should lift Apple's operating margin over time, as well as alleviate some of the wild revenue swings that usually accompany major iPhone upgrade cycles.
But it's not about where Apple has been so much as where it's going. Right now, Apple isn't going anywhere. In fiscal 2023 (ended Sept. 30), Apple reported an $11 billion (2.8%) year-over-year decline in sales. Though its services segment generated 9% sales growth for the fiscal year, every physical product division saw sales decline -- iPhone, iPad, Mac, and Wearables.
What makes this underperformance even more eye-popping is that it occurred with above-average inflation as a tailwind. Apple is one of the best-known and most-trusted brands on the planet. The fact that it wasn't able to raise its prices enough to lift its sales with above-average inflation demonstrates how weak organic demand was for its physical products in fiscal 2023.
To add to this, while Apple was able to avoid a decline in year-over-year earnings per share thanks to its incredible share repurchase program, net income did decline from $99.8 billion to $97 billion. In other words, buybacks appear to be the only thing really saving Apple stock from a meltdown at this point.
Historically, investors have had no qualms paying an aggressive multiple to own shares of Apple if the company is growing by a double-digit rate. But with a negative real-growth rate, Apple stock is highly unattractive at 27 times forward-year earnings.
