Since the acronym was first coined more than a decade ago, FAANG has become synonymous with big tech, representing some of the best-performing stocks of a generation:
- Facebook, which changed its name to Meta Platforms
- Apple
- Amazon
- Netflix
- Google, now known as Alphabet (GOOGL -3.54%) (GOOG -3.36%)
Data by YCharts.
It's easy to understand the attraction. These five companies are all leaders in their respective industries, changing the technological landscape as we know it. Try to imagine a world without their collective impact on social media, mobile communication, e-commerce, cloud computing, streaming video, and online search -- it's hard to picture.
The paradigm shift wrought by each of these companies has also been profitable for their investors. Since the acronym debuted in early 2013, these stocks generated life-changing returns of between 626% and 1,790%, far outpacing the broader market.
Investors shouldn't be too quick to discount them even today, as they remain dominant forces, and each one outperformed both the S&P 500 and the Nasdaq Composite in 2023.
I am a longtime shareholder in all the FAANG stocks, but if I could buy just one in 2024, Alphabet would be the clear choice.
Image source: Getty Images.
The once and future king
It's difficult enough for a company to dominate one industry, so the fact that Alphabet dominates two and is a strong contender in a third is all the more impressive.
It all began with internet search. Since the debut of Google Search in 1997, the company has dominated the landscape, currently controlling 92% of the market, according to internet statistics aggregator StatCounter. Google search acts as a conduit for Alphabet's industry-leading online advertising business. It was responsible for 30% of digital ad sales worldwide in 2022, according to data compiled by online industry publication Digiday. It's unlikely that would have changed much in 2023, though the final tally isn't yet available.
There's no question the digital advertising industry has faced headwinds over the past couple of years, as marketing budgets have historically been slashed in the face of economic uncertainty -- and the recent bear market was no different.
It appears the tide has turned, and online advertising is on the rebound. After declining for several consecutive quarters, Google's ad sales have posted year-over-year increases in each of the previous two quarters, and that trend is expected to continue. As the industry leader, Alphabet has the most to benefit from the recovery.
Last but certainly not least is Alphabet's competitive position in cloud infrastructure services as No. 3 of the "Big 3" cloud providers. Amazon Web Services and Microsoft Azure are No. 1 and No. 2, respectively.
For most of the past several years, Google Cloud has been the fastest-growing of the three, though it recently ceded that title (at least temporarily) to Microsoft. Azure was quick to offer artificial intelligence (AI) services to its cloud customers, which helped the company gain market share. Google has since launched its own set of cloud-related AI tools, which could help change the dynamic.
The adoption of AI has just begun
The advent of generative AI last year caused a stir because of its ability to create original content and streamline mundane and time-consuming tasks. As a result, businesses are scrambling to take advantage of the resulting increases in productivity. No one knows how lucrative AI will ultimately be, but most experts place the market opportunity in the trillions of dollars -- though estimates vary wildly.
Alphabet recognized the opportunity and rolled out a number of AI-powered offerings, which include more than 100 built AI models, via its Vertex AI platform. This accelerates the time it takes to adopt AI and helps Google Cloud users "build, deploy, and scale AI-powered applications," the company says.
It recently introduced Duet AI, which it says was "specifically trained to help users be more productive on Google Cloud." Duet was also integrated into Alphabet's cybersecurity, search, and a variety of other products and services.
The most recent development was last month's introduction of Google Gemini, the next-generation large language model that underpins its AI. Early assessments suggest that Gemini offers five times greater computational capacity than OpenAI's GPT-4, according to tests conducted by semiconductor research company SemiAnalysis. This could mark a big step forward for Alphabet's AI ambitions.
Google has a keen advantage as one of the major cloud providers, offering it a built-in delivery mechanism for getting AI into the hands of customers. Needham analyst Laura Martin suggested that generative AI will help catapult Alphabet's market cap to $3 trillion in the coming years, or a potential upside of about 73% compared to Wednesday's closing price.
Alphabet stock is historically cheap
As outlined above, there's a lot to like about Alphabet. The company leads the way in search and digital advertising and is a keen competitor in cloud infrastructure services. There are other opportunities, which include YouTube (its ubiquitous streaming service) and its autonomous driving platform Waymo.
Those opportunities aside, perhaps the most compelling reason to buy Alphabet is its sticker price. The stock is historically cheap, selling for roughly 26 times earnings, comparable with the S&P 500, even though Alphabet has far outpaced the wider market recently and over the past decade.
