2 FAANG stocks to buy and 1 to avoid in May
For much of the past decade, the stock market has been on fire. Over the past 10 years, the iconic Dow Jones Industrial Average, reference S&P 500and technology dependent Nasdaq Composite returned 166%, 209% and 390% respectively.
However, a significant portion of these gains come from FAANG stocks.
By FAANG I am referring to:
With the exception of Facebook, which went public in 2012, the 10-year returns for these companies are as follows:
- Facebook: 762%
- Apple: 967%
- Amazon: 1,670%
- Netflix: 1,430%
- Alphabet: 780%
Imagine having the weakest horse in the group (Alphabet) and still earning an annualized average of 24% over the course of a decade. This is more than triple the historical average annual rate of return for the S&P 500.
While FAANG stocks have been simply unstoppable for a long time, some look more attractive for the future than others. As we move headlong into May, two FAANG stocks offer unmissable appeal, while another looks like a company worth avoiding for now.
The first FAANG share to buy: Facebook
For starters, social media giant Facebook made it clear with its first quarter operating results that it was the best value among FAANGs.
The company’s eponymous site attracted 2.85 billion monthly active users (MAUs) in the first quarter, with Instagram and WhatsApp also garnering 600 million unique UAMs. Together, this represents 3.45 billion AMUs. To put that in some context, 44% of the world’s population visited an asset owned by Facebook at least once a month in the first quarter. The size of Facebook’s audience, as well as the targeting of the data it can provide, make it the undisputed destination for advertisers. After increasing ad revenue by 21% in 2020 – during the worst economic recession in decades – ad revenue climbed 46% in the first quarter.
Now here’s the real kicker: Of the $ 25.4 billion in ad revenue generated in the first quarter, most came from his eponymous site and Instagram. Neither Facebook Messenger nor WhatsApp has yet been significantly monetized. This means that Facebook is growing 20% to 25% per year with only half of its top assets contributing significantly. Imagine how robust earnings and cash flow will be when WhatsApp and Facebook Messenger are monetized.
Don’t overlook ancillary sales channels, either. In particular, Facebook’s “Other” category – home to its Oculus virtual reality devices, among others – saw 146% year-over-year revenue growth in the first quarter to $ 732 million.
The point is this: Facebook can be bought for about 22 times next year’s revenue, but it continues to grow by 20% or more every year. That’s an unheard of level of cheapness for such a high growth company.
The second FAANG stock to buy: Amazon
The other FAANG action that has proven to be an obvious buy is e-commerce giant Amazon. Like Facebook, Amazon released its most recent quarterly results last week.
A common theme among FAANG stocks is industry dominance. While Facebook has four of the six most visited social sites in the world, Amazon controls about 39.7% of all online market share in the United States, according to a March 2020 eMarketer report. , about $ 0.40 of every dollar spent online in the United States goes through Amazon. That’s about 33 percentage points more than its closest competitor.
Admittedly, the retail margins are not that good. To top it off, Amazon has over 200 million people worldwide enrolled in Prime. The fees Amazon collects from Prime help the company lower prices from physical retailers. Additionally, paid members tend to spend more within Amazon’s ecosystem and stay loyal to its products and services. On an annual basis, subscription services now exceed $ 30 billion in revenue.
However, the real star here seems to be the Amazon Web Services (AWS) cloud infrastructure segment. AWS sales catapulted 30% more in 2020 and grew a further 32% in the first quarter of 2021 compared to the period a year earlier. Since cloud margins are significantly juicier than retail margins, AWS becoming a larger percentage of total sales will cause Amazon’s cash flow to skyrocket.
Amazon isn’t cheap compared to traditional metrics, but it’s historically inexpensive given the cash flow forecast. Amazon ended each year of the 2010s with a price / cash flow multiple ranging from 23 to 37. Based on Wall Street’s consensus cash flow estimate for 2024, Amazon is only valued at a multiple. of about 12 times the cash flow. That makes it a garish buy and a good bet to overtake Apple as the world’s largest publicly traded company.
The FAANG stock to avoid: Netflix
Across the aisle, I would suggest streaming content provider Netflix is the FAANG stock to avoid in May (and in the future).
Obviously, a company doesn’t reach a market cap of $ 226 billion without doing something right. Netflix has done an exceptionally good job strengthening its domestic and international subscriber base before and during the pandemic. He also improved the loyalty of existing subscribers by creating many original shows.
However, Netflix is set to face three pretty big hurdles in 2021 and beyond.
First, it will likely have to contend with slower subscriber growth as developed countries like the United States emerge from the pandemic. When the lockdowns were in effect a year ago, people lined up to subscribe to Netflix to pass the time. With developed countries well engaged in their coronavirus vaccination campaigns, getting out of their homes is now the goal of hundreds of millions of consumers. This translates into slower growth in the number of subscribers for the business.
Second, competition continues to intensify in an industry where barriers to entry are relatively low. Walt disneyDisney + ‘s streaming service took just 16 months to go from launch to more than 100 million subscribers. For comparison, Netflix ended the first quarter with 208 million paid subscriptions. It’s not out of the question that Disney + will eventually catch up with Netflix in the subscriber column. Tack on Alphabet’s YouTube, which generates as much revenue on an annual basis as Netflix, and you’ve got a recipe for slower growth as the competition picks up.
Third, Netflix was a constant cash burner until 2020. I have always believed that the best way to measure the value of FAANG shares was to look at their cash flow multiples. It works well with Facebook, Apple, Amazon, and Alphabet. However, this does not work with Netflix. This is because Netflix is investing a lot of money in international expansion efforts and had negative cash flow until 2019. While these are efforts that I can appreciate, Netflix just doesn’t deserve its high. assessment against its temperate growth prospects.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.