The acronym FAANG coined by CNBC host Jim Cramer consists of five companies:
- (F) Meta Platforms (META -4.13%), formerly known as Facebook
- (A) Amazon (AMZN -2.56%)
- (A) Apple (AAPL -1.22%)
- (N) Netflix (NFLX -9.09%)
- (G) Alphabet (GOOG -1.10%) (GOOGL -1.23%), formerly known as Google
This group of five large-cap tech companies dominated the market through late 2021, absolutely crushing the S&P 500.
META Total Return Level data by YCharts.
Since then, almost every company has been a disaster.
META Total Return Level data by YCharts.
Still, these companies are dominant in their fields, and with their poor performance over the past year and a half, a couple of stocks have reached a strong buying point. So which ones do I think have a chance for a strong recovery? Read on to find out.
1. Amazon
In 2022, Amazon dealt with the problems of its overexpansion. It's currently incinerating cash at the rate of nearly $20 billion over the past 12 months, but through layoffs and shutting down programs, it's slowly clawing its way back to a cash-generative state.
While this cash burn is what many investors focus on (rightfully so), its North American commerce and Amazon Web Services (AWS) segments have both done well, as revenue grew 20% and 27% in the third quarter. Furthermore, Amazon's advertising services grew 25% year over year and became Amazon's fourth-biggest segment, generating $9.5 billion in sales.
Amazon's business, from the revenue side, is thriving. While it has some kinks to work out in the middle, the bones of a strong business are there. However, the market is valuing Amazon like it's doomed.
AMZN PS Ratio data by YCharts.
The current Amazon is a much broader business than it used to be last time it was valued this low. At this price, Amazon is a steal, and investors should consider picking up shares if they think Amazon can fix its expense problems.
2. Alphabet
Similar to Amazon, Alphabet's expenses have come under the microscope. Despite Alphabet's operating expenses rising 26% and headcount increasing 25%, the company could only deliver 6% revenue growth in Q3. That's an atrocious return on its hiring. However, Alphabet recently took steps to remedy that.
Alphabet laid off about 12,000 employees, or 6% of its workforce, in mid-January. That's expected to save between $2.5 billion and $3 billion annually in costs, which is helpful but still not nearly enough to offset its hiring spree (Alphabet hired more than 35,000 people over the past year).
However, With Alphabet's dominance in the search (Google) and video (YouTube) space, its properties will continue to generate massive revenue streams once advertisers are ready to spend again (likely near the end of 2023). Furthermore, its Google Cloud segment grew at a 38% pace in Q3 -- significantly faster than AWS's 27% growth.
Despite Alphabet's margins getting crunched, the stock trades at 21 times free cash flow -- its lowest in a decade. Betting on Alphabet to right the ship is likely a great strategy, and with the stock trading for as cheaply as it is, it's practically a no-brainer buy at these levels.
Why aren't the remaining three aren't great buys?
So with Amazon and Alphabet two solid choices among the FAANG names, what's wrong with the others?
The hardest one to leave out of my two best buys list was Apple, the largest company on Earth by market cap. It's also the only stock to beat the S&P 500 while many others were decimated. Over this period, it has proven to be the best managed, which has earned the stock a premium valuation. At 23 times earnings, Apple is well above its pre-2020 average valuation of around 16. Apple is an expensive stock, and while it will likely perform well going forward, it doesn't have the upside of my two favorites.
The worst-performing stock of the bunch since November 2021 is Meta Platforms. With the business model switching to a metaverse focus, the company's earnings plummeted, and free cash flow (FCF) fell off a cliff. Couple that with a challenging advertising environment, and Meta isn't a stock I'd want to own shares in currently.
Netflix hasn't performed much better than Meta due to its struggle to grow subscribers. In 2022, Netflix's subscriber count fell for the first time on record. Although it has begun to recapture some of those clients, the growth hasn't been impressive -- it's in the mid-single digits. Netflix is going through a significant business transformation, and now likely isn't the best time to get into the stock.
This will be a pivotal year for the FAANG stocks, as all but Apple have a lot of work to do, including cutting costs and increasing profitability. However, the market is pricing both Alphabet and Amazon like it won't happen -- a bet many investors should be willing to take. With both companies reporting earnings in early February, investors should consider getting in before they lay out their 2023 plans to improve their profitability -- moves that will likely send their stocks up.
