The stock market has soared over the past decade. A $10,000 investment made in a market tracking fund such as Vanguard S&P 500 ETF (NYSEMKT: VOL) in early 2014 would be worth $29,673 today after experiencing compound annual growth of 11.6%, assuming dividends are reinvested along the way.
But the handful of elite stocks known as the FAANG group generated even higher returns. Over the past decade, an equally weighted portfolio reinvested in the dividends of these five stocks would have grown from $10,000 to $89,051. This represents a staggering compound annual growth rate of 24.7%. It was a bumpy ride as the FAANG portfolio outperformed S&P500 (INDEXSNP: ^GSPC) tracker in five years and underperformed in the other five, but the strong results in 2015, 2020 and 2023 made up for the weak period in 2022.
In case you don’t know FAANG, I’m talking about these familiar companies:
Metaplatforms (NASDAQ:META)formerly known as Facebook,
Aalphabet (NASDAQ:GOOG) (NASDAQ:GOOGL)the parent company of Google.
The smallest 10-year gain among these high-end stocks was 400% for Alphabet. At the other end of the scale, Apple led the way with a stock price increase of 867%. The Cupertino-based iPhone maker is also the group’s sole dividend payer; reinvesting those payments would have brought an investor’s total return on Apple stock to 1,000% in 10 years.
But even the members of this exclusive club are not always unquestionable buyers. Right now, I see two great investment opportunities for 2024 in this group, but one that investors should avoid until further notice.
FAANG without hesitation buys number 1. 1: Alphabet
Google’s parent company suffered a sharp fall in 2022. Its two dual-class shares fell as much as 42%, as the company was crippled by a rickety global economy and a weak digital advertising market. Overall, Alphabet’s stock was virtually unchanged over the past two years, posting a 3% loss.
That said, its growth, once stalled, is now back. Alphabet’s trailing 12-month sales are now $297 billion, up from $258 billion in fiscal 2021. That’s 15% more, 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 the slump caused by inflation. Google Cloud is a leading provider of cloud access to powerful artificial intelligence (AI) tools, and the company designs its own AI accelerator microchips.
Thus, Alphabet’s stock chart is at a standstill while the company returns to its declining growth. These days, Alphabet shares can be had at modest valuations of 27 times current earnings and 23 times free cash flow. These values are below their long-term averages and you know that Alphabet will remain relevant in the long term. Ergo, this seems like a great time to pick up Alphabet stock at a low price.
Obvious purchase FAANG #2: Netflix
If Alphabet suffered a major blow in 2022, the market took Netflix to the stake for a real punch. The streaming video pioneer’s stock fell as much as 72% last year, and despite a strong rebound, Netflix is still trading 19% below its late 2021 level. After a brief period where its theme investment was a horror story, the company looks more like a wholesome, family-friendly feature that deserves excessive investment.
The fact is that the big drop it took in 2022 never made sense to me. Investors essentially punished Netflix for doing exactly what they hoped: emphasizing margins and profitable revenue growth. Management’s increased desire for profitability has come at the cost of slower customer growth, which was once the most critical number to watch in each of Netflix’s quarterly reports. Old habits die hard, and the market reaction to Netflix’s updated strategy has been brutal.
Today, Netflix’s stock price has nearly tripled from the multi-year low it hit in mid-2021. The most obvious opportunity to take advantage of the buying window is behind us. Still, Netflix seems like a solid buy to me with reignited growth engines and modest valuation ratios. Notably, Netflix stock is cheaper than ever on a price-to-free cash flow basis, which is the exact financial metric that the company’s critics complained about the most.
Cash flow may decline somewhat in 2024 as Netflix’s content production projects get back on track following the 2023 writers’ and actors’ strikes, but the long-term trend is clear. Netflix is no longer looking for customers at all costs. Instead, the company is optimizing its cash flow and profits, even at the cost of slower subscriber growth. This change suits me perfectly, and Wall Street as a whole should eventually adopt it as well.
Until then, Netflix remains obvious to me.
The FAANG Stock to Avoid in 2024: Meta Platforms
I’m not here to throw Meta Platform under the bus, but the operator of Facebook, Instagram, and WhatsApp just doesn’t look like a buy right now.
The company’s all-out bet on the metaverse is years away from paying metaphorical dividends. Revenue from the Reality Labs division represents a rounding error in Meta’s overall financial structure, amounting to 0.6% of total sales in the recent third quarter report. But management is relying with all its might on this potential growth engine. That $210 million in third-quarter revenue resulted in an operating loss of $3.7 billion for the Reality Labs division.
But the company beat Wall Street expectations in three of four earnings reports this year and investors view Mark Zuckerberg’s company as a promising AI innovator. The stock thus gained 198% in 2023, largely erasing the drop in prices in 2022.
“Wait a minute, Anders,” I hear you say. “Isn’t this the same story as Alphabet, which has experienced similar stock trends and advertising quirks over the past two years? If you like Alphabet, you should also like meta-platforms.”
Well, I see the similarities, but Meta’s situation is drastically different than Alphabet’s. The company formerly known as Facebook may have some AI ideas up its sleeve, but it can’t compete with Google’s decades of AI expertise or the clout of Google’s service Cloud in AI. And if AI is supposed to save Meta from its low-growth quagmire, the heavy spending on metaverse projects should be considered a costly distraction.
In summary, Meta Platforms currently appears to be a hot stock, and I’m not convinced that AI will be a game-changer for the company. If and when the market as a whole comes to the same conclusion, Meta stock could experience a painful price correction. Until then, I’d rather not touch this overheating social media stock, even though it’s part of the market-beating FAANG group.
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, 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 holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Netflix, and Vanguard S&P 500 ETF. The Mad Motley has a disclosure policy.
2 FAANG Stocks to Buy in 2024 and 1 to Avoid was originally published by The Motley Fool