Lost in all the headlines about the Magnificent 7 companies was the previous gang of high-growth tech stocks known as FAANG. The acronym represents five well-known tech companies: Facebook, now Meta Platforms (NASDAQ:META), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and Google, now Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
The term “FAANG stocks” was coined by Jim Cramer back in 2013, this collection of tech stalwarts went on to produce amazing returns for investors. Over the past decade, an initial investment of $10,000 in a five-stock FAANG portfolio would have generated total returns over 880% compared to a 158% return by the S&P 500. That’s an annualized return of 25.7%, or two-and-a-half times greater than the benchmark index.
Most of the FAANG stocks got carried over into the Magnificent 7 gang. Yet where the former were considered stocks to buy, the latter is actually a cautionary tale. Those seven stocks had rocketed so high that they accounted for virtually all of the gains of the S&P 500. If you removed the group from the performance calculations, the index only grew by about 6% in 2023. Often you weren’t being exhorted to jump on the bandwagon, but warned against what could happen if their growth stalled.
Being as there is such overlap between the two camps of stocks, let’s look closer at three FAANG stocks still worth buying.
Alphabet (GOOG)(GOOGL)
There are two very good arguments for buying Alphabet stock, its dominant position in the digital advertising industry and its surprisingly still-attractive valuation. Between Google, YouTube, Gmail, Google Maps, Google Chrome, Android and Google Cloud, Alphabet is the world’s largest online advertising platform. Google and YouTube are also the most popular search engine and video platform in the world, respectively. These platforms attract billions of users and advertisers, generating huge revenues and profits for the company. Total advertising revenue grew from $116.5 billion in 2018 to $224.5 billion last year. It is running 4% higher over the first nine months of 2023.
At 27 times earnings, Alphabet also trades at a relatively low price-to-earnings ratio compared to its FAANG peers. And though Meta goes for slightly less forward earnings ratio, Alphabet is still comparatively competitive at 21 times estimates. It also produces a prodigious amount of free cash flow (FCF). Over the past 12 months, FCF is some $77 billion or 29% more than in 2022. Alphabet isn’t cheap per se, but at 23x FCF it’s comparatively best.
Even after the tremendous growth Alphabet experienced over the past year and decade, the market is undervaluing the leading ad platform’s growth potential and competitive advantage. Alphabet has a strong balance sheet, a diversified portfolio of products and services, and a culture of innovation that could lead to new opportunities in the future. This FAANG stock offers more bite than bark.
Netflix (NFLX)
It was all but over for Netflix just a few years ago. In preparation for launching their own streaming services, movie studios were pulling content from the platform and Netflix was scrambling to buy whatever it could from around the world. It was clearly a case of quantity over quality. Although its stock got a boost during the pandemic lockdowns, the dramatic growth of competing services meant doom for Netflix.
At the start of 2024, it’s a much different story. Netflix has essentially won the streaming wars. Where Disney’s (NYSE:DIS) Disney+ is declining and Warner Bros Discovery (NASDAQ:WBD) and Paramount Global (NASDAQ:PARA) already want to merge, Netflix is in expansion mode. It added 8.8 million customers in Q3, a 10.8% increase. It now has 247 million subscribers worldwide.
In fact, that’s one of the main arguments for buying Netflix stock, strong subscriber growth. Two others are its sustainable FCF growth and its new ad-based tier that gives it new and better expansion possibilities.
Netflix subscriptions are accelerating, proving there is still room for additional expansion in the global streaming market. It is also generating substantially more FCF though it expects “lumpiness” in the quarters ahead due to the actors and writers strikes. Netflix is at a point where it can invest in content and technology without burning cash.
Amazon (AMZN)
Amazon is the undisputed e-commerce and cloud services leader. It has a 37.6% share of the market, according to Statista, and a 32% share of the global cloud infrastructure market through Amazon Web Services. These segments generate huge revenues and profits for the company, and have plenty of room to grow as more businesses and consumers shift to online platforms.
Like Alphabet, Amazon is benefiting from renewed growth in digital advertising. While Google is dominant for web searches, people begin their product search journey on Amazon. eMarketer noted 57% of consumers start their online shopping not on Google, but on Amazon. Advertising services revenue surged 25% in Q3 to over $12 billion. It might trail Alphabet and Meta, but it’s an important channel for it and the advertising industry. It should boost Amazon’s revenue and profitability long-term as it leverages its massive user data and advertising network.
Of course, AWS has long been Amazon’s profit center. Although growth was slower than expected last quarter, the e-commerce giant is adding new artificial intelligence tools to further build out the platform and enhance customer growth.
On the date of publication, Rich Duprey held a LONG position in WBD stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
