2 FAANG stocks to buy like there’s no tomorrow

FAANG shares have dominated the market for a decade.

The group that includes Metaplatforms (formerly Facebook), Amazon (AMZN 1.88%), Apple, netflixand Alphabet (GOOGL 3.78%) (GOOG 3.85%) (formerly Google) has generated monster returns for years, but most of these stocks have crashed in the past year. Four of the five are down more than 40% from their highs of last year.

Rising interest rates, recession fears and other macro headwinds put pressure on these stocks, ending the most popular bet on Wall Street.

However, in the fallout, there are opportunities, and two FAANG stocks look poised to reward investors over the next few years.

Image source: Getty Images.

FAANG Stock #1 to Buy: Amazon

Amazon stock is down nearly 50% from its peak a year ago, and its third-quarter earnings report shows why the mighty e-commerce giant has fallen.

The company surprised investors by forecasting revenue growth of just 2% to 8% in the fourth quarter, anticipating its weakest ever revenue increase over the holiday season. The stock fell 7% on this news and has continued to fall since then.

However, it is a mistake to think that Amazon’s growth is permanently blocked. Like many of its peers, the company cited macro headwinds for weakness, but performance is expected to improve in 2023.

First, the company’s most profitable businesses, like Amazon Web Services (AWS), its cloud infrastructure business and advertising, continue to grow at a healthy pace. AWS revenue jumped 27% in the third quarter to $20.5 billion, with an operating margin of 26%. In other words, AWS’ revenue run rate reached $80 billion with an operating profit of more than $20 billion.

Ad revenue, meanwhile, jumped 25% to $9.5 billion, or nearly a $40 billion run rate. Amazon doesn’t make a profit from advertising, but it’s fair to assume margins are probably in the 30% range, as they are at Google and Facebook.

The core e-commerce business has weighed on overall results this year as it faces excess inventory levels, over-expanding capacity during the pandemic and a general slowdown in e-commerce sales this year with the reopening of the world economy.

In order to improve e-commerce profitability, the company is reducing its warehouses and has imposed hiring freezes in a number of divisions. Last year, its e-commerce business, including advertising, brought in $6.3 billion in operating revenue. There’s no reason Amazon can’t get back to it, especially with even higher revenue. If e-commerce activity turns positive again, the stock should experience a major shake-up.

FAANG stock #2 to buy: Alphabet

Like Amazon, Alphabet stock has fallen sharply over the past year and also fell in its recent earnings report. Google’s parent company posted just 6% revenue growth in its third quarter as macroeconomic headwinds weighed on the advertising business, and the company continued to lose billions in Google Cloud and… other bets. Ad revenue even declined for YouTube and the Google Network, with ads served on partner websites.

Alphabet also faces tough comparisons to 2021, when brands were spending aggressively on digital advertising. In the third quarter a year ago, its revenue had increased by 41%.

Management is responding to slowing demand and the company plans to cut hiring through next year. After its headcount increased by 25% compared to last year, this should contain costs and restore the company’s usual profitability.

Alphabet stock is down nearly 43% from its peak a year ago, although nothing fundamental has changed significantly about the company. The company still has a search monopoly with at least a 90% market share in most of the world, and search advertising remains a high-margin growth market. In search, the company posted an operating margin of 50% in the quarter, which was actually down from a year earlier.

Alphabet isn’t licensed to print money, but the research industry is pretty close, and the only thing holding it back are macroeconomic headwinds. Demand from advertisers will eventually return, and when it does, the business and the stock should rebound.

FAANG stock trades at a price-earnings ratio of just 17, making it cheaper than the stock S&P500. For a tech monopoly that still has a significant growth opportunity ahead of it, this looks like a mistake.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Jeremy Bowman holds positions at Amazon, Meta Platforms, Inc. and Netflix. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Meta Platforms, Inc. and Netflix. The Motley Fool recommends the following options: $120 long calls in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.

Comments are closed.