2 FAANG stocks to buy and 1 to avoid in 2022

Wall Street delivered another winning year in 2021. The Benchmark S&P500 soared 27%, more than double its average annual total return of 11% (including dividends) dating back to 1980.

But if you have held FAANG shares for a long time, you are used to easily outperforming the general market. FAANG shares are:

FAANG companies are profitable and dynamic companies that have demonstrated sustainable competitive advantages over a long period of time.

Image source: Getty Images.

But in 2022, only two stand out as great buys. Meanwhile, a popular FAANG action should be actively avoided this year.

FAANG Stock #1 to Buy: Amazon

In the traditional sense, e-commerce giant Amazon is not cheap. But based on its undisputed leadership position in two trends, as well as its expected growth in operating cash flow, it’s one of the most obvious FAANGs to buy in 2022.

Most people know Amazon because of its leading online marketplace. According to eMarketer, Amazon is expected to have brought in 41.4% of all online spending in the United States last year. That’s more than 34 percentage points ahead of the closest competitor.

However, online retail sales generally generate very thin margins. To counter this, Amazon turned to its annual Prime subscription. Members enjoy a number of benefits, including free two-day shipping and access to Amazon’s vast library of content. In return, the company gets high-margin subscription revenue that helps boost margins and allows it to lower prices from brick-and-mortar retailers. It also doesn’t hurt that Prime members are spending more with Amazon and staying in its ecosystem of products and services.

What investors may not realize is that Amazon is also the kingpin of cloud infrastructure spending. Amazon Web Services (AWS) generated nearly a third of all global cloud infrastructure revenue in Q3 2021. Cloud infrastructure growth is still in its infancy and, more importantly, the associated margins to cloud services are significantly higher than online retail margins. So even though Amazon’s e-commerce growth is slowing down a bit, the segments that provide the biggest increase in operating cash flow — such as AWS, subscriptions, and advertising — are seeing steady double-digit growth. .

Between 2010 and 2020, Amazon has hovered between a year-end cash flow multiple of 23 to 37. If the company were to simply maintain the median of this cash flow multiple (30) that Wall Street and investors have been just paying for more than a decade, shares could reasonably hit $10,000 by the middle of the decade.

A person wearing a virtual reality headset and moving their hand in response to the virtual world.

Image source: Getty Images.

FAANG Stock #2 to Buy: Meta Platforms

The second FAANG stock just begging to be bought in 2022 is Meta Platforms. With Meta, it’s about sustained social media dominance, a look into the future, and its very attractive valuation.

Even though Meta officially changed its name from Facebook in late October, there’s no doubt where the lion’s share of the company’s revenue still comes from: advertising.

Based on the company’s third-quarter operating results, 2.91 billion monthly active users visited Facebook in the third quarter, and an additional 670 million unique users head to Instagram and/or WhatsApp each month. Together, we’re talking about 3.58 billion people, or more than half of the world’s adult population, interacting with a Meta-owned asset every month. There is simply no platform that allows advertisers to reach so many eyeballs, which is why Meta enjoys such incredible advertising pricing power.

Yet, as I’ve noted before, Meta has yet to fully monetize its core assets. Even though it likely generated more than $100 billion in ad revenue last year, nearly all of that revenue came from Facebook and Instagram. Assuming Facebook finally pulls the monetization levers on WhatsApp and Facebook Messenger, it will be able to generate additional sales and profits for an already rapidly growing business.

In 2022, all eyes seem to be on the Metaverse – the next iteration of the internet designed to allow users to interact in 3D virtual environments. Facebook aims to be a leader in virtual reality with its Oculus devices, and it invested $10 billion last year in metaverse-related products and services.

It’s rare that you find a company close to a $1 trillion market capitalization that continues to grow around 20% on an annual basis and is valued at around 24 times its earnings this year. Meta looks like an absolute bargain.

Two excited people holding new iPhones on display in an Apple store.

Image source: Apple.

The FAANG stock to avoid in 2022: Apple

For as long as I can remember, streaming content provider Netflix has been my FAANG to avoid. The company’s history of aggressive spending and cash outflows, along with increasing competition, made it the logical FAANG to avoid. But in 2022, the honor goes to the world’s first $3 trillion company, Apple.

To be fair, Apple is a solid company that should be around for a very long time. The iPhone is a leader in smartphones in the United States, and the company has some of the most loyal customers in the world, as evidenced by the lines that surround its stores whenever a new product debuts.

In addition, Apple has enjoyed sustained double-digit growth in services revenue, which should help improve margins over time and eliminate the revenue slump that sometimes accompanies product replacement cycles. With the company reporting $104 billion in operating cash flow over the past 12 months, it’s one of those stocks that investors buy and hide for a while.

However, 2022 could be a much tougher year for the world’s largest publicly traded company. For example, the rollout of 5G wireless infrastructure has already encouraged many people to upgrade their iPhones and other wireless devices to enjoy faster wireless download speeds. This suggests that Apple will face some very tough year-to-year competition.

Additionally, the Federal Reserve has signaled its intention to begin raising interest rates in 2022, as well as ending its quantitative easing program altogether. This is a recipe for lending rates to rebound to all-time lows. I mention this because Apple has been known to issue low-interest debt to fund its stock buyback program. There is a real possibility that future Apple stock buybacks will decline a bit as borrowing rates become less favorable.

But the icing on the cake, at least for me, is Apple’s valuation. Wall Street only expects sales growth of 4% this year and 5% in fiscal 2023, but the stock is valued at a high multiple of 32 times earnings in 2022. repurchase, Apple’s earnings could even be flat or down in the year. 2022. It’s just not an attractive value right now.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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