2 FAANG shares to buy and 1 to avoid like the plague
Although it may not seem like it right now, the stock market is one of the most stable creators of long-term wealth. Including dividends, benchmark S&P500 averaged a total annual return of approximately 10%. This greatly exceeds the average annual returns for bonds, housing and commodities.
But why settle for the average? Over the past decade, so-called FAANG stocks have let the S&P 500 eat their dust. When I say “FAANG”, I am referring to:
- Metaplatforms (META -0.76%)formerly known as Facebook
- Apple (AAPL 1.62%)
- Amazon (AMZN 3.15%)
- netflix (NFLX 2.90%)
- and Alphabet (GOOGL -0.21%) (GOOG -0.27%)formerly known as Google.
Over the 10-year period to July 1, 2022, Meta, Apple, Amazon, Netflix and Alphabet (Class A shares, GOOGL) rose 415%, 566%, 860%, 1,740% and 650% , respectively. Meanwhile, the S&P 500 has gained 181% over this period.
FAANGs are industry leaders, well-known innovators, and tend to generate a boatload of operating cash flow that is often plowed back into their businesses. In other words, there’s a very good reason why these five stocks have performed so well.
But not all FAANG stocks are worth your hard-earned cash right now. While two FAANGs stand out as incredible values that can be bought hand-in-hand, another long-time winner sends out clear “avoid” signals.
FAANG #1 To Buy Hands On Fist: Meta Platforms
The first FAANG stock just begging to be bought by opportunistic long-term investors is Meta Platforms.
Meta shares ended last week more than 58% below their all-time intraday high set less than a year ago. Wall Street is clearly concerned about how the company’s advertising platform will cope with the growing likelihood of a national and/or global recession. To boot, analysts also criticized the company’s aggressive Metaverse spending, which weighed on Meta’s profitability.
While these headwinds should not be discounted, they are either short-lived or overlook large-scale growth initiatives.
For example, Meta remains a social media beast. Facebook, Facebook Messenger, Instagram and WhatsApp, all owned by Meta, are consistently among the most downloaded social media apps. In the quarter ended March, the company’s app collection attracted 3.64 billion unique monthly users. This equates to more than half of the world’s adult population visiting a Meta-owned asset every month. Businesses fully understand that their best chance of reaching a large audience is with Meta’s apps, which is why the company has such incredible advertising pricing power.
While the company’s extensive investments in the metaverse are unlikely to generate significant sales or contribute to profitability for years to come, the company has the operating cash flow and balance sheet to take risks on this. which could very well be a multi-trillion dollar opportunity. Meta generated more than $14 billion in cash from operations in the first quarter and ended March with $43.9 billion in cash, cash equivalents and marketable securities.
Opportunistic investors can buy shares of Meta Platforms right now for less than 12 times Wall Street’s projected earnings for 2023, or about 10 times projected earnings if you exclude its cash. It has simply never been so cheap.
FAANG No. 2 to buy by hand: Alphabet
Another FAANG stock worth buying in spades is Alphabet, the parent company of internet search engine Google and streaming platform YouTube.
It doesn’t sound like a broken record, but Alphabet’s biggest concern is the possibility of a US or global recession. Like Meta, Alphabet brings in the lion’s share of its ad revenue. Unfortunately, ad spend tends to be one of the first things to be cut in a recession. This could be an overhang for Alphabet’s advertising business until the Federal Reserve moves to aggressively raise interest rates.
But these fears of recession appear to be greatly exaggerated. Although recessions are inevitable, they usually last no longer than two quarters. By comparison, periods of economic expansion are measured in years. Over long periods of time, advertising-focused businesses should benefit from the natural expansion of the US and global economy.
Alphabet’s foundation continues to be the Internet search engine Google. Data from GlobalStats shows that it has controlled no less than 91% of the global Internet search market over the past two years. As a convenient monopoly, it should come as no surprise that Google can wield superior advertising pricing power.
While Google has the potential to maintain low double-digit sales growth, Alphabet’s many ancillary revenue channels are truly exciting. YouTube, for example, is now the second most visited social media site on the planet (2.56 billion monthly active users). This helps generate subscription revenue as well as ad placement.
Alphabet’s cloud infrastructure segment, Google Cloud, also happens to be the world’s No. 3 cloud services spender. Cloud growth is still in its infancy, as evidenced by Google Cloud’s steady 40% to 50% annual sales increases. Due to the juicy margins typically associated with cloud services, this segment could play a significant role in Alphabet’s operating cash flow growth.
Like Meta, Alphabet has never been cheaper. Stocks can be bought with confidence now for around 16.5 times Wall Street’s projected earnings for 2023.
FAANG stock to avoid like the plague: Apple
At the other end of the spectrum is a FAANG stock that just isn’t worth investors’ hard-earned money right now. At the risk of committing investment blasphemy, I would suggest avoiding Apple’s tech kingpin.
Before I get into the reasons to avoid Apple, let me clear things up: Apple is a solidly profitable company with an incredible balance sheet and return on capital program. It has repurchased nearly $500 billion of its common stock since the start of 2013 and distributes nearly $14.9 billion in dividends to its shareholders each year.
Moreover, Apple has a globally recognized brand and is the leading smartphone player in the United States. I repeat: it is a well-managed company.
However, bear markets tend to compress earnings and sell multiples for growth stocks, and they are notorious for refocusing Wall Street on value investing. Unfortunately for Apple, it offers the weakest growth prospects among the FAANGs and just isn’t that cheap.
Apple saw some success after introducing 5G-enabled iPhones in Q4 2020. But each subsequent iPhone model offers only modest differences (e.g. improved camera quality). This is going to make it increasingly difficult for the company to achieve significant growth from its best-selling product.
Another concern for those who want to dig a little deeper is that Apple’s stock buyback program is helping to mask its lack of growth. Repurchasing shares reduces the number of shares outstanding, which can give the impression that earnings per share are up, even if operating income remains unchanged year over year. For example, adjusted earnings per share in the fiscal second quarter (ended March 26) increased 8.6% from the prior year quarter; but operating profit jumped 5.8%, less impressive.
If you negate the positive impact of Apple’s takeovers on its earnings, investors are paying about 21 times projected earnings next year for operating profit growth of perhaps 4% to 5%. It’s not particularly intriguing in a bear market, which makes Apple such an easy pass at its current price.