It’s been a tumultuous four-year ride for Wall Street and investors alike. Since January 2020, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have oscillated between bear and bull markets, showcasing the inherent unpredictability of the stock market over short time frames.
During times of elevated volatility, investors typically gravitate towards the safety of well-established, industry-dominating performers. This is precisely why the FAANG stocks have trounced the broader market over the past decade.
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Unrivaled Competitive Advantages: A Closer Look at FAANG Stocks
When mentioning “FAANG stocks,” reference is made to:
The competitive advantages that each of these corporations brings to the table seem insurmountable.
- Meta Platforms stands behind the world’s leading social media assets, including Facebook, WhatsApp, Instagram, and Facebook Messenger, collectively drawing nearly 4 billion monthly active users during the December-ended quarter.
- Apple has been a dominant domestic player in the smartphone industry since the introduction of the iPhone, and is transitioning into a services-focused company with an unparalleled share repurchase program exceeding $600 billion since 2013.
- Amazon’s e-commerce marketplace accounted for nearly $0.40 of every $1 in U.S. online retail sales in 2022, with Amazon Web Services (AWS) being the leading provider of cloud infrastructure services globally.
- Netflix leads in domestic and international streaming share, with an expansive library of original content.
- Alphabet’s Google commanded 91.5% of global internet search share in January, in addition to housing streaming giant YouTube and Google Cloud, positioned as the No. 3 cloud infrastructure service provider worldwide by market share.
Despite these robust competitive edges, the future of each FAANG stock varies significantly. In February, one historically undervalued FAANG stock emerges as an exceptional buy, while another highflier is poised to confront potential headwinds.
Emphatic Buy Recommendation: Alphabet
Among the five long-standing outperformers mentioned above, it is Google, YouTube, Google Cloud, and Waymo parent Alphabet that gleams as the most astute buy in the fleeting month of February.
Even the most promising stocks face potential headwinds. For Alphabet, the primary concern revolves around the likelihood of the U.S. slipping into a recession at some point this year. Various indicators suggest that a downturn is probable. Given that Alphabet’s revenue is predominantly derived from advertising, a recession would likely result in slowed growth and profits.
However, there are two sides to this coin — and it distinctly favors patient investors. Although recessions are normal in the economic cycle, history reveals that only three of the 12 downturns occurring since the end of World War II lasted 12 months. In contrast, almost every economic expansion since September 1945 has endured for multiple years. Businesses reliant on advertising with sustainable competitive advantages are ideally positioned to thrive over extended periods.
Google’s unassailable position as the preeminent search engine is expected to persist. It has maintained a monthly worldwide search share of over 90% for over nine years, indicating sustained pricing power and escalating operating cash flow over time.
Nevertheless, the more compelling aspect for most investors (including myself) is the potential of Alphabet’s secondary operating segments. For instance, daily views of YouTube Shorts have soared by over eightfold since 2021. This surge is likely to bolster YouTube’s ad-pricing power and bolster user sign-ups for high-margin subscriptions.
Moreover, Alphabet’s rapidly expanding cloud segment has delivered four consecutive quarters of operating profit in 2023, following years of operating losses. With enterprise cloud spending still in its early stages, the anticipated higher margins associated with cloud services would amplify Alphabet’s operating revenue as Google Cloud claims a larger share of net sales.
Alphabet’s Growth and Netflix’s Decline: A Tale of Two FAANG Stocks
Alphabet’s Robust Performance Amidst FAANG Stocks
One of the most titan FAANG stocks, Alphabet, at present exhibits extraordinary fortitude and robustness. The subject of much adulation, Alphabet continues to soar financially, boasting a truly impressive $141.6 billion in cash and equivalents. This mammoth cash hoard has burgeoned by $7 billion since the conclusion of the third quarter. Alphabet’s monster-sized treasury should endow it with the flexibility to witness unrestrained expansion opportunities or procure strategic assets. Furthermore, the explosive cash flow and bountiful cash reserves would girdle the tech giant’s balance sheet, empowering it to double down on acquisitions or capital expenditures should the occasion arise.
Not only is Alphabet fiercely successful, but its stock is also undervalued. With a forward-year earnings multiple of 19, it stands lower than the benchmark S&P 500, while its consensus cash flow multiple in 2025 is approximately 26% below the cash-flow multiple over the trailing five years. The stock’s current valuation is a compelling buying opportunity, especially when viewed through the lens of historical norms.
The Clouds Looming Over Netflix
On the flip side of the FAANG coin, Netflix finds itself in a tightening bind. Despite upping its subscription prices, Netflix faces a swarm of adversaries in the form of media behemoths like Walt Disney, Paramount Global, and Warner Bros. Discovery. These seasoned contenders possess deep-pocketed coffers, enabling them to weather streaming losses while fortifying their position in the market.
While Netflix has shown positive growth in its cash flow and fervently pursued share repurchases, it struggles against its premium valuation. Priced at approximately 27x forward-year earnings and 26x forward-year cash flow, Netflix remains the costliest FAANG stock relative to cash flow, leading to its foreseeable avoidance in the investment arena.
Alphabet’s ascent and Netflix’s descent present a remarkable dichotomy within the FAANG universe, reflecting the volatility and dynamism of the stock market. Investors would do well to take cognizance of this tale of two FAANG stocks and the broader market dynamics at play.
