For much of the last four years, Wall Street and its investors have experienced a roller coaster ride. All three major stock indexes have fluctuated between bear and bull markets in consecutive years since 2020.
When things get tough on Wall Street, the recipe for investors over the last decade has been to turn their attention to FAANG stocks.
When I say “FAANG” I mean this:
- Facebook, now a subsidiary of Metaplatforms (META -0.54%).
- Amazon (NASDAQ:AMZN).
- Apple (AAPL 2.11%).
- Netflix (NASDAQ: NFLX).
- Google is now a subsidiary of alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG).
During times of increased volatility, investors flock to FAANG stocks for two reasons. First of all, these are industry leaders with sustainable competitive advantages.
- Meta Platforms closed the third quarter with nearly 4 billion monthly active users (MAUs) across its prime social media “real estate.”
- Amazon is the world’s leading online marketplace and also the world’s No. 1 spender on cloud infrastructure services through Amazon Web Services (AWS).
- Apple’s iPhone consistently accounts for more than half of the U.S. domestic smartphone market share, and its return on investment program is unmatched.
- Netflix is the national and international market leader in streaming services.
- Alphabet’s Google has a virtual monopoly in global internet search, with a share of nearly 92% as of October 2023. It also trails Google Cloud, the world’s third-largest cloud infrastructure services provider.
The other reason investors are drawn to FAANG stocks during times of instability is their historical outperformance of the broader market.
While the scale S&P 500 While the company has returned an admirable 149% over the past decade, Alphabet’s (GOOGL) Class A shares are the FAANG stocks, which are “only” 373% higher. At the other end of the spectrum, Apple, the world’s largest publicly traded company by market capitalization, has increased the S&P 500’s returns sixfold over the past decade.
But as the famous investing saying goes, “Past performance is no guarantee of future results.”
While one FAANG stock surging in December is proving to be an easy bargain, another consistent outperformer is full of warning signs.
The FAANG stock to buy for the first time in December: Meta Platforms
Among the five successful companies listed above, the social media company Meta Platforms is the one with the best value for money.
Before we dive into the catalysts that could push Meta’s market cap even higher, let’s first examine the two headwinds that could weigh on its share price.
The biggest ongoing concern for Meta is the company’s operating losses related to its augmented and virtual reality segment, Reality Labs. This pet project of CEO Mark Zuckerberg lost nearly $11.5 billion in the first nine months of 2023, just over $2 billion more than the same period last year.
The other source of skepticism is the health of the U.S. economy. Even as U.S. gross domestic product rises and the unemployment rate is historically low, a number of predictive indicators and money-based metrics point to trouble ahead. Meta generates over 98% of its net revenue from advertising, and advertisers are not afraid to cut spending at the first sign of trouble for the U.S. economy. In other words, economic turmoil can hit Meta harder than the other FAANG stocks.
However, the economic cycle is a two-sided coin and anything but proportional. While nine of 12 U.S. recessions since the end of World War II have ended in less than a year, most recovery periods have lasted several years, if not a full decade. These lengthy expansion phases allow Meta to have exceptional pricing power in ad placement.
Something else that helps Meta succeed is the aforementioned “prime social media real estate.” Combined, Facebook, WhatsApp, Instagram and Facebook Messenger are among the top four most downloaded apps worldwide, recording 3.96 billion MAUs in the third quarter. Additionally, Threads reached 100 million users faster than any other social media app (five days) after its launch in July.
Despite Reality Labs’ growing operating losses, Meta is able to more than offset these losses with ample profits from its advertising activities. Meta generated $51.7 billion in net cash from its operating activities in the first nine months of the current year and ended September with more than $61 billion in cash, cash equivalents and marketable securities. Meta’s balance sheet and operating performance make Meta one of the few companies that has the luxury of taking big risks. By the second half of the decade, Reality Labs could position Meta as the leading entry into the metaverse.
As promised, meta is also historically cheap. Even after more than tripling since its bear market bottom in 2022, Meta is currently valued at less than 11 times future year’s cash flow, and its earnings per share (EPS) are expected to nearly triple between 2022 and 2026. For comparison, Meta has traded at almost 16 times year-end cash flow on average over the past five years.
The FAANG stock to avoid like the plague in December: Apple
Unfortunately, not every FAANG stock is worth buying right now. The one that FAANG should avoid like the plague in December is none other than the largest publicly traded company in the US – Apple.
Let me be clear that I am not taking anything away from what Apple has achieved and become the largest domestic publicly traded company. There’s no denying that the iPhone is a juggernaut.
CEO Tim Cook also deserves recognition for his leadership qualities over the last 12 years. He successfully oversees Apple’s evolution from a company focused on physical products to one whose long-term foundation is based on subscription services. Subscriptions typically generate very predictable revenue and operating cash flow, which should help smooth out the revenue fluctuations that can occur during large iPhone upgrade cycles (e.g. moving from 4G LTE to 5G).
I would also like to add that Apple is one of the most well-known and trusted brands in the world. Few companies have comparable customer loyalty.
However, past performance is no guarantee of future results. Although Apple has a huge stock buyback program, the company’s operating performance leaves much to be desired.
In Apple’s 2023 fiscal year, which ended September 30, all of the company’s physical products suffered a decline in sales. The company’s iPhone sales fell $4.9 billion to $200.6 billion, while Mac sales fell by more than a quarter to $29.4 billion compared to the same period last year. The return to the office after the worst of the COVID-19 pandemic appears to be the reason for weaker Mac demand.
What makes this drop in sales even worse is the fact that it was accompanied by above-average inflation. Even with a strong brand name and pricing power as tailwinds, Apple’s net sales fell $11 billion (2.8%) to $383.3 billion in fiscal 2023.
Profit growth has also stalled. Thanks to share repurchases, Apple achieved an adjusted increase of $0.02 per share year-over-year. But based on net income alone, Apple reported a year-over-year decline of $2.8 billion in fiscal 2023.
Even though the iPhone 15 is expected to boost Apple’s operating performance in fiscal 2024, the company’s shares are currently trading at a historically high 27 times future year earnings. While this aggressive valuation could potentially be defended with a double-digit growth rate, Apple’s growth engine has stalled.
The final problem is that rapidly rising interest rates — the federal funds rate has risen 525 basis points since March 2022 — have denied Apple access to cheap capital. Although the company generates plenty of cash organically, Apple hasn’t been afraid to borrow at historically low borrowing rates to fuel its aggressive stock repurchase program. A higher interest rate environment could lead to fewer buybacks and weaker EPS growth for Apple.
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. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Sean Williams has held positions at Alphabet, Amazon and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, and Netflix. The Motley Fool has a disclosure policy.