The five FAANG stocks took a hit in 2022. Over the past year, every single one of these tech titans has underperformed S&P500 Index, which didn’t have a great year at all:
META data from YCharts
But that was then and that is now. Most of the FAANG greats are poised to bounce back in 2023 and most likely beating the market with their current spring-loaded discounts. Read on to see why alphabet (GOOG 0.97%) (GOOGL 1.09%) and Amazon (AMZN 2.99%) fit this bill in my eyes.
I could talk you into the long-term benefits of ownership Netflix (NFLX 0.81%), but the stock has nearly doubled since mid-July and no longer seems like the most obvious surefire hit on the market to me. This recovery is already in full swing. Still a great investment, but you might want to hold your horses on buying Netflix until this Thursday’s fourth-quarter earnings report.
Speaking of iPhone manufacturers Apple (AAPL 1.01%) The company faces manufacturing issues and other unique headwinds, so I’m not very confident Cupertino’s stock can outperform the S&P 500 in 2023.
This works out meta platforms (META 0.20%), formerly known as Facebook, whose problems are so pervasive that I recommend doing whatever you can to avoid this year. Read on beyond the Alphabet and Amazon reviews if you want to hear more.
Buy FAANG 1: Alphabet
Alphabet’s stock is down 36% since the end of 2021. However, it is important to remember that market sell-offs can often present buying opportunities. If so, there are several reasons why the parent company of Google and YouTube remains a strong buy.
First and foremost, Google has a virtual monopoly on the search engine market with over 90% search market share around the world. I’d show you a chart, but it’s pretty boring when Google’s global market share is exhausted and everyone else has agglomerated in single-digit percentages. This gives the company tremendous market power and reliable profits, as well as an established brand in many sub-sectors of the technology market. That dominance is unlikely to change anytime soon, making Google and its many services a reliable source of income for Alphabet.
Another reason to buy Alphabet stock is the company’s generous profit margins. Over the long term, Alphabet’s operating margins have often hovered in the 25%-35% range, with a decline around the early COVID-19 crisis, followed by a surge over the past two years.
Additionally, Alphabet’s cloud infrastructure business, Google Cloud, shows potential for profitable long-term growth. While it currently lags behind rivals like Amazon Web Services, it’s growing fast, with revenue up 38% to $6.9 billion in its most recent quarter. Additionally, the division’s negative operating margin narrowed from -14% to -10% in the third quarter, indicating a path to profitability. While it may never be as profitable as AWS or Azure, it should ultimately make a significant contribution to Alphabet’s bottom line.
After all, Alphabet’s other bets, like Waymo, its autonomous vehicle division, and life science projects could potentially pay off over the years. These deals give Alphabet long-term flexibility that’s worth its weight in gold. While they’ve lost over $20 billion over the past five years and generated little revenue, any breakthroughs in these areas could have a significant impact on the company’s bottom line. I’m sure that one day the Google name will fade as new technologies and unprecedented competitors undermine traditional web search and advertising. In its place, one or more of today’s or tomorrow’s “other bets” will take over, allowing Alphabet investors to forget the Google name and still be excited about the company’s future.
Despite the recent market sell-off and worries about the economy, Alphabet’s search dominance, massive profit margins, Google Cloud’s growth potential, and other bets make it a strong buy for long-term investors. And the stock trades at a very reasonable 18 times earnings, which also gives value investors something to chew on.
Buy FAANG 2: Amazon
E-commerce giant Amazon dived deeper than Alphabet in 2022. The stock has gotten off to a strong start this year, but it’s still lagged Alphabet’s returns since the end of 2021, down 41%. There was a reason for this price drop, and you need to weigh these bearish arguments before investing your money in Amazon stock.
The primary pressure point for Amazon is competition. The company used to have a solid first-mover advantage and was the only game in town, but many old-school retailers have stepped up their online sales to offer stiffer competition. This has made it difficult for Amazon to maintain its rapid growth rates and dominant market share. While Amazon still rules the American e-commerce space with a 38% market share, Walmart (WMT 0.33%) has a 30% share of the e-commerce grocery market, according to Euromonitor data. This is an important segment and Amazon is struggling to gain a foothold here.
Additionally, Amazon has invested heavily in its physical logistics network, giving it delivery advantages over traditional retailers. This comes at a significant cost, including increases in net shipping costs and fulfillment costs. That infrastructure spend now accounts for 16.8% of revenue.
However, there are also plenty of reasons for optimism about Amazon’s business and shares.
Amazon Web Services (AWS) cloud computing platform has long been Amazon’s primary source of profitability at a segment level and continues to drive the company’s revenue growth. AWS revenue rose 27% in the third quarter and year-to-date operating income of $17.3 billion is 33% higher year over year.
So Amazon’s stock has had a rough year, but the sharp drop in price looks like an overreaction. The company’s e-commerce dominance, AWS profitability, and the potential for robust growth in cloud computing make Amazon stock a strong buy for long-term investors.
The FAANG Stock to Stay Away From: Meta Platforms
Meta’s core advertising business has faltered over the past year for a number of reasons, including Apple’s iOS update with new restrictions on advertiser ad tracking, the rise of TikTok and its competition from Instagram, and macroeconomic headwinds hurting the broader advertising market . So, Meta’s operating margins are at multi-year lows, and the stock is down 59% over the same period as Alphabet and Amazon’s slightly smaller falls.
To counter TikTok, Meta invested aggressively in expanding Instagram Reels, but warned that monetizing these short videos would be more difficult than its feed-based ads. However, instead of streamlining its business to offset those costs, Meta doubled down on expanding its Reality Labs segment, which houses its virtual reality products. These efforts got off to a rocky start. Reality Labs segment revenue grew less than 3% year-on-year to $1.4 billion in the first nine months of 2022, while operating loss narrowed to $9.4 billion from $6.9 billion. dollars increased.
That painful combination of slowing growth and rising spending has turned investors off, with analysts expecting sales to fall 2% and earnings to fall 33% in 2022. For 2023, Wall Street expects sales to rise 5% and earnings to fall 15% as spending continues to rise. It’s also worth noting that Meta insiders have sold almost four times as many shares as they have bought over the past 12 months.
Slowing sales, falling profits, weak insider trading, and an unconvincing response to increasing competition aren’t traits I look for in potential investments. Meta still has some work to do before I would consider buying or recommending this stock, starting with a clearer answer to the TikTok challenge. Until then, I’m happy to stay on Meta’s sidelines.
Randi Zuckerberg, a 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. Suzanne Frey, an executive at Alphabet, 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. Anders Bylund has positions at Alphabet, Amazon.com and Netflix. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Meta Platforms, Netflix, and Walmart. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.