The stock market has risen rapidly over the last decade. A $10,000 investment in a market-oriented fund like the Vanguard S&P 500 ETF (VOO -0.27%) at the start of 2014 would be worth $29,673 today, having grown at a compound annual growth rate of 11.6%, assuming dividends were reinvested over time.
But the elite few stocks known as the FAANG group have delivered even higher returns. Over the last decade, an equal-weighted portfolio of these five stocks, reinvested in dividends, would have grown from $10,000 to $89,051. That's a staggering compound annual growth rate of 24.7%. It was a bumpy ride as the FAANG portfolio outperformed S&P 500 (SNPINDEX: ^GSPC) tracker in five years and underperformed in the other five years, but the excellent results of 2015, 2020 and 2023 outweighed the weak period of 2022.
In case you don't know FAANG, I'm talking about these well-known companies:
- Metaplatforms (META -1.22%), formerly known as Facebook,
- Apple (NASDAQ:AAPL),
- Amazon (NASDAQ:AMZN),
- Netflix (NFLX -0.74%),
- Aalphabet (GOOG -0.25%) (GOOGL -0.39%), the parent company of Google.
The smallest 10-year gain among these blue-chip stocks was 400% for Alphabet. At the other end of the scale, Apple led the way with an 867% increase in share price. The Cupertino-based iPhone maker is also the only dividend payer of the bunch; Reinvesting these payouts would have increased an investor's total return on Apple stock to a whopping 1,000% in 10 years.
But even the members of this exclusive club are not always without controversy. For now, I see two excellent investment opportunities for 2024 in this bundle, but one that investors should avoid for the time being.
No. 1 No. 1 FAANG Purchase: alphabet
The Google parent company experienced a severe crash in 2022. Both classes of stocks in its dual class fell as much as 42% as the company was hamstrung by a fragile global economy and a weak digital advertising market. Overall, Alphabet stock has performed virtually nothing over the past two years, posting a loss of 3%.
However, the previously stalled growth has now started again. Alphabet's trailing-twelve-month revenue is now $297 billion, up from $258 billion in fiscal 2021. That's up 15%, in case you prefer to think in percentages. Free cash flow increased from $67 billion to $78 billion over the same period, an increase of 16%.
Above all, Alphabet's future looks bright. The advertising market is recovering from its inflation-related slump. Google Cloud is a leading provider of cloud-based access to powerful artificial intelligence (AI) tools, and the company is even developing its own AI accelerator microchips.
So Alphabet's stock price has stalled while the company has revived flagging growth. Today, Alphabet shares are trading at modest valuations of 27 times trailing earnings and 23 times free cash flow. These values are below their long-term averages, and you know that Alphabet will remain relevant over the long term. Ergo, this seems like a good time to grab some Alphabet shares on the cheap.
Obvious FAANG Purchase #2: Netflix
If Alphabet took a hit in 2022, the market sent Netflix back for a good beating. Shares of the streaming video pioneer fell as much as 72% last year, and despite a strong recovery, Netflix is still trading 19% below levels at the end of 2021. After a brief period in which the investment theme was a horror story , the company looks more like a healthy, family-friendly feature worth investing in.
The thing is, the big drop in 2022 never made sense to me. Investors essentially punished Netflix for doing exactly what they had hoped for – namely, placing a new focus on margins and profitable revenue growth. Management's increased desire for profitability has coincided with slower customer growth, which used to be the most important metric to watch in every Netflix quarterly report. Old habits die hard, and the market reaction to Netflix's updated strategy has been brutal.
Netflix's share price has now roughly tripled since its multi-year low in mid-2021. The most obvious opportunity to take advantage of the buying window is behind us. Still, I think Netflix is a solid buy with reinvigorated growth engines and modest valuation ratios. Notably, Netflix stock is cheaper than ever as a price-to-free cash flow ratio, which is exactly the financial metric that the company's critics have complained about most.
Cash flows may decline somewhat in 2024 as Netflix's content production projects get back on track following the writer and actor strikes of 2023, but the long-term trend is clear. Netflix is no longer looking for customers at any price. Instead, the company is optimizing its cash flows and profits, even at the expense of slower subscriber growth. I'm fine with this change, and Wall Street as a whole should accept it at some point.
Until then, I think Netflix remains a clear buy.
The FAANG stock to avoid in 2024: Meta Platforms
I'm not here to pressure Meta Platform, but the operator of Facebook, Instagram and WhatsApp just doesn't seem like a buy right now.
The company's all-in bet on the metaverse is still years away from paying metaphorical dividends. The Reality Labs division's sales represent a rounding error in Meta's overall financial structure and amounted to 0.6% of total sales in its most recent third-quarter report. But management is putting all its efforts into this potential growth driver. That $210 million in third-quarter revenue came with a $3.7 billion operating loss for the Reality Labs division.
But the company beat Wall Street's earnings expectations in three of this year's four earnings reports, and investors see Mark Zuckerberg's company as a promising AI innovator. The share price increased by 198% in 2023, largely offsetting the price decline in 2022.
“Wait a minute, Anders,” I hear you say. “Isn't this the same story as Alphabet, which experienced similar stock price trends and advertising quirks over the last two years? If you like Alphabet, you should also love Meta Platforms.”
Well, I see the similarities, but Meta's situation is dramatically different than Alphabet's. While the company formerly known as Facebook has some AI ideas under its belt, it can't match Google's decades of AI expertise or the AI-infused strength of Google Cloud service. And if AI is to rescue Meta from the quagmire of low growth, the heavy spending on Metaverse projects must be viewed as an expensive distraction.
In summary, Meta Platforms appears to be a dynamic stock right now, and I'm not convinced that AI will be crucial to the company. If the broader market comes to the same conclusion, Meta stock could see a painful price correction. Until then, I'd rather stay away from this overheated social media stock, even though it belongs to the market-leading FAANG group.
Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anders Bylund holds positions in Alphabet, Amazon, Netflix and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Netflix and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.