It has certainly been a roller-coaster ride for Wall Street and investors over the past four years. Since the beginning of 2020, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have experienced volatile shifts between bear and bull markets, exemplifying the unpredictable nature of the stock market over short time frames.
During times of elevated volatility, investors often seek the safety of well-established, industry-leading performers, leading them to the FAANG stocks, which have outperformed the broader market over the last decade. The term “FAANG stocks” encompasses Meta Platforms, Apple, Amazon, Netflix, and Alphabet, five companies boasting seemingly insurmountable competitive advantages.
Given their unparalleled competitive edges, the outlook for each FAANG stock varies significantly. In February, one historically undervalued FAANG stock shines as a compelling buy, while another highflier is poised to face a multitude of potential challenges.
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The Unbeatable Competitive Advantages of the FAANG Stocks
The FAANG stocks comprising Meta Platforms, Apple, Amazon, Netflix, and Alphabet bring unparalleled competitive advantages to the table. These include dominating shares of the social media, smartphone, e-commerce, streaming, and cloud industries, respectively, alongside unparalleled brand recognition and innovative business strategies.
Alphabet: A Promising Buy Amidst Uncertainty
Out of the five long-standing outperformers, Google, YouTube, Google Cloud, and Waymo parent Alphabet emerge as the most promising buy for February.
While the potential for a U.S. recession poses a concern, Alphabet’s dominant position as the leading search engine in the world is set to remain unchallenged. Furthermore, the rapid growth of Alphabet’s ancillary operating segments, such as YouTube Shorts and Google Cloud, promises to enhance its profitability and reinforce its competitive standing.
Alphabet also presents an attractive valuation, trading at a forward-year earnings multiple of 19, lower than the benchmark S&P 500, and a consensus cash flow multiple of 13.4x in 2025, about 26% below its average over the trailing five years.
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Netflix: A Stock to Approach with Caution
Conversely, streaming service Netflix appears as the FAANG stock to approach with caution. While historically resilient, Netflix faces potential headwinds, including the need to maintain its substantial subscription pricing power and leverage its expansive content library adequately.
Although Netflix’s cash flow is showing positive growth, there are concerns. The company experienced significant growth in free cash flow last year, allowing for aggressive stock repurchases. However, not all is rosy for Netflix as potential challenges loom.
The Decline of Netflix and the Impending Streaming Wars
Fierce Competition from Traditional Media Giants
In the arena of streaming, the stakes are high, and the competition has never been fiercer. With heavyweights such as Walt Disney, Paramount Global, and Warner Bros. Discovery rapidly expanding their subscriber bases, the landscape is shifting. These media stalwarts, historically backed by lucrative legacy TV segments, now possess substantial capital to weather temporary losses as they bolster their streaming divisions.
Forecasting the Profitability of Competitors
Disney anticipates a definitive pivot to recurring profitability within its streaming segment by the conclusion of the current fiscal year, slated for September 2024. Meanwhile, both Paramount and Warner Bros. Discovery are primed to experience considerably diminished streaming losses as advertising revenues surge, cost-cutting measures take effect, and subscription prices escalate.
Red Flags Within Netflix
Netflix’s recent endorsement of a substantial $10 billion share repurchase program in October raises concerns. While buybacks are considered favorable for shareholders, expansive repurchase initiatives are typically the domain of mature businesses or those grappling with innovation fatigue. An upsurge in buybacks might indicate a struggle for fresh and inventive strategies, an alarming prospect considering Netflix’s valuation.
Premium Valuation and Financial Risk
On the valuation front, Netflix’s shares currently command a towering 27x forward-year earnings and 26x forward-year cash flow, situating it as the costliest FAANG stock concerning cash flow. Consequently, it emerges as an evidently avoidable stock in the discernible future.
Investment Considerations with Alphabet
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