The stock market has soared over the last decade. A $10,000 investment made in a market-tracking fund like the Vanguard S&P 500 ETF (NYSEMKT: VOO) at the start of 2014 would be worth $29,673 today after having grown at a compound annual rate of 11.6%, assuming that dividends were reinvested along the way.
But the handful of elite stocks known as the FAANG group has delivered even stronger returns. In the last decade, an equal-weighted and dividend-reinvested portfolio of these five stocks would have grown from $10,000 to $89,051. That’s a mind-blowing 24.7% compound annual growth rate. It was a bumpy ride, as the FAANG portfolio outperformed the S&P 500 (SNPINDEX: ^GSPC) tracker in five years and underperformed in the other five, but stellar results of 2015, 2020, and 2023 outweighed the weak 2022 period.
In case you’re not familiar with FAANG, I’m talking about these familiar companies:
Meta Platforms (NASDAQ: META), formerly known as Facebook,
Apple (NASDAQ: AAPL),
Amazon (NASDAQ: AMZN),
Netflix (NASDAQ: NFLX),
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the parent company of Google.
The mildest 10-year gain among these top-shelf stocks was 400% for Alphabet. At the other end of the scale, Apple led the way with an 867% share price increase. The Cupertino-based iPhone maker is also the only dividend payer of the bunch; reinvesting those payouts would have lifted an investor’s total return on Apple stock to a cool 1,000% in 10 years.
But even the members of this exclusive club aren’t always indisputable buys. Right now, I see two excellent investment opportunities for 2024 in this bunch, but one that investors should avoid until further notice.
No-brainer FAANG buy No. 1: Alphabet
The Google parent took a hard fall in 2022. Both of its dual-class stock types fell by as much as 42% as the company was hamstrung by a rickety global economy and a weak digital advertising market. Overall, Alphabet’s stock has gone essentially nowhere over the past two years, posting a loss of 3%.
That said, its formerly stalled growth is back in action now. Alphabet’s trailing-12-month sales stand at $297 billion today, up from $258 billion in fiscal year 2021. That’s 15% higher, in case you prefer to think in percentages. Free cash flow rose from $67 billion to $78 billion over the same period, a 16% increase.
Above all, Alphabet’s future looks bright. The advertising market is coming back from its inflation-induced slump. Google Cloud is a leading provider of cloud-based access to powerful artificial intelligence (AI) tools, and the company even designs its own AI accelerator microchips.
So Alphabet’s stock chart has stalled while the business rekindled its fading growth. These days, Alphabet shares can be had at the modest valuations of 27 times trailing earnings and 23 times free cash flows. These readings stand below their long-term averages, and you know Alphabet will stay relevant in the long run. Ergo, this looks like a great time to scoop up some Alphabet shares on the cheap.
No-brainer FAANG buy No. 2: Netflix
If Alphabet took a bruising in 2022, the market took Netflix behind the woodshed for a proper pummeling. The streaming video pioneer’s stock dropped by as much as 72% last year, and despite a strong rebound, Netflix still trades 19% below where it ended 2021. After a brief period when its investment theme was horror story, the company looks more like a wholesome family-friendly feature again, and well worth binge-investing in.
The thing is, the big drop it took in 2022 never made sense to me. Investors essentially punished Netflix for doing exactly what they had been hoping it would do — putting a fresh focus on margins and profitable revenue growth. Management’s enhanced desire for profitability came at the cost of slower customer growth, which used to be the most essential figure to watch in each of Netflix’s quarterly reports. Old habits die hard, and the market’s reaction to Netflix’s updated strategy was brutal.
Now, Netflix’s stock price has approximately tripled from the multiyear low it touched in mid-2021. The most glaringly obvious opportunity to take advantage of the buying window is behind us. Still, Netflix strikes me as a solid buy with reignited growth engines and modest valuation ratios. In particular, Netflix stock is cheaper than ever on a price-to-free-cash-flow basis, which is the exact financial metric the company’s critics used to complain about the most.
Cash flows may dip somewhat in 2024 as Netflix’s content production projects get back on track after the writers’ and actors’ strikes of 2023, but the long-term trend is clear. Netflix is no longer seeking customers at any cost. Instead, the company is optimizing its cash flows and profits, even at the cost of slower subscriber growth. I’m perfectly fine with that switch, and Wall Street as a whole should eventually embrace it as well.
Until then, Netflix remains a no-brainer buy in my book.
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-in bet on the metaverse is years away from paying metaphorical dividends. The Reality Labs division’s revenues amount to a rounding error in Meta’s overall financial structure, clocking in at 0.6% of total sales in the recent third-quarter report. But management is leaning into that potential growth driver with all its might. Those $210 million in third-quarter revenues came at the cost of an operating loss of $3.7 billion for the Reality Labs division.
But the company exceeded Wall Street’s earnings expectations in three of this year’s four earnings reports and investors see Mark Zuckerberg’s business as a promising AI innovator. So the stock has gained 198% in 2023, largely erasing 2022’s price drop.
“Wait a minute, Anders,” I hear you say. “Isn’t this the same story as Alphabet, which experienced similar share price trends and advertising quirks over the last two years? If you like Alphabet, you should love Meta Platforms too.”
Well, I see the similarities, but Meta’s situation is dramatically different from Alphabet’s. The company formerly known as Facebook may have some AI ideas in its holster, but it can’t match Google’s decades of AI expertise or the AI-infused heft of the Google Cloud service. And if AI is supposed to save Meta from its low-growth morass, the heavy spending on metaverse projects must be viewed as an expensive distraction.
In sum, Meta Platforms seems like a momentum-powered stock right now, and I’m not convinced that AI will be a game-changer for the company. If and when the broader market reaches the same conclusion, Meta’s stock could experience a painful price correction. Until then, I’d rather keep my hands off this overheated social media stock, even if it is part of the market-beating FAANG group.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to 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 has positions in Alphabet, Amazon, Netflix, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Netflix, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
2 FAANG Stocks to Buy in 2024 and 1 to Avoid was originally published by The Motley Fool