For more than 12 years, growth stocks have been the talk of Wall Street. That’s because historically low lending rates and ongoing quantitative easing from the nation’s central bank have rolled out the red carpet for fast-paced companies to borrow and expand.
But among growth stocks is a subset of exceptional performers that have truly outpaced the market since the end of the Great Recession. I’m talking about the FAANG stocks.
The FAANGs have run circles around the broader market
The FAANG acronym stands for:
- Facebook (NASDAQ:FB)
- Apple (NASDAQ:AAPL)
- Amazon (NASDAQ:AMZN)
- Netflix (NASDAQ:NFLX)
- Google, which is now a subsidiary of Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG)
Since the benchmark S&P 500 bottomed out on March 9, 2009, it’s gained 555%, through this past weekend. By comparison, the FAANG stocks have left the broader market in their dust over this same time frame:
- Facebook: Up 972% since IPO in 2012
- Apple: Up 5,628%
- Amazon: Up 5,624%
- Netflix: Up 10,615%
- Alphabet: Up 1,853% (Class C shares, GOOG)
If you’re wondering why these companies have outperformed the market by such a wide margin, it likely has to do with their innovation, competitive advantages, and leading market share in their respective industries.
But even among the FAANG stocks there can be winners and companies worth avoiding. As we near the homestretch for 2021 (i.e., the fourth quarter), two FAANG stocks stand out as clear buys while another might be best off avoided.
FAANG stock No. 1 to buy in Q4: Facebook
The first of the group that I don’t see as anywhere close to having reached its full potential is social media giant Facebook.
The biggest objection to overcome with Facebook is its warning that growth would slow in the second half of 2021. This cautionary tale has been fairly consistent of late for growth-oriented stocks as higher vaccination rates have encouraged people to get out of their homes. However, Facebook’s conservative outlook doesn’t overshadow its social media dominance or the growth levers it’s yet to pull.
When the June quarter ended, this company had 2.9 billion monthly active users (MAUs) visiting its namesake site, along with 610 million additional unique MAUs visiting WhatsApp and/or Instagram, which Facebook also owns. That’s north of 3.5 billion MAUs, or about 44% of the global population. Advertisers are well aware there’s not a platform on this planet they can go to that’ll provide them with a way to reach a broader audience with their message. This gives Facebook incredible ad-pricing power in virtually any economic environment.
The crazy thing about Facebook is that it’s on pace to bring in more than $100 billion in ad revenue this year, yet has only monetized two of its four core assets. While its namesake site and Instagram produce ad-driven revenue, WhatsApp and Facebook Messenger aren’t meaningfully monetized. Pulling these levers could send Facebook’s operating cash flow to new heights.
And there’s more. The company is angling to be a leader in virtual reality (VR)/augmented reality. Although sales for its VR Oculus devices aren’t broken out in its quarterly reports, “Other” category revenue, which includes Oculus, has jumped 85% through the first six months of 2021 to $1.23 billion.
I’m simply not buying into the thesis that we’ll see significant slowing from Facebook anytime soon. That makes its forward-year price-to-earnings ratio of less than 23 an absolute steal.
FAANG stock No. 2 to buy in Q4: Amazon
The second FAANG stock to pile into for the fourth quarter is e-commerce kingpin Amazon.
The story with Amazon is exactly the same as Facebook. The company anticipates slowing growth in the second half of the year as buying habits shift and people leave their homes with greater frequency due to rising coronavirus vaccination rates. However, with the company dominating two key industries and seeing no slowing in its highest-margin segments, any weakness in Amazon should be viewed as a reason to pounce.
What do I mean when I say dominant? Approximately $0.40 of every $1 spent online in the U.S. this year is expected to route through Amazon’s marketplace, according to a report from eMarketer. That’s more than…
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