2 FAANG Stocks to Buy in 2023 and 1 to Avoid: Here’s Why

The five FAANG stocks took a beating in 2022. Last year, each and every one of these tech titans underperformed the S&P 500 index, which wasn’t having a great year in the first place:

META data by YCharts

But that was then, and this is now. Most of the FAANG greats are poised to bounce back in 2023, most likely beating the market from their current spring-loaded discounts. Read on to see why Alphabet (GOOG 0.97%) (GOOGL 1.09%) and Amazon (AMZN 2.99%) fit that bill in my eyes.

I could talk your ear off about the long-term virtues of owning Netflix (NFLX 0.81%) but the stock has nearly doubled since mid-July and no longer strikes me as the most obvious no-brainer buy on the market. This recovery is well underway already. Still a great investment, but you may want to hold your horses on buying Netflix until this Thursday’s fourth-quarter earnings report.

As for iPhone maker Apple (AAPL 1.01%), the company faces manufacturing issues and other unique headwinds, so I’m not terribly convinced that Cupertino’s stock can outperform the S&P 500 in 2023.

That leaves Meta Platforms (META 0.20%), formerly known as Facebook, whose trouble runs so deep that I recommend going out of your way to avoid it this year. Read on beyond the Alphabet and Amazon reviews if you want to hear more.

FAANG buy 1: Alphabet

Alphabet’s stock is down 36% since the end of 2021. However, it’s important to remember that market sell-offs can often present buying opportunities. In this case, there are several reasons why the parent company of Google and YouTube remains a strong buy.

First and foremost, Google has a virtual monopoly on the search engine market, with over 90% market share in search around the world. I’d show you a graph, but it’s pretty boring with Google’s global market share maxed out and everyone else bunched up in single-digit percentages. This gives the company tremendous market power and reliable profits, as well as an entrenched brand across many sub-sectors of the technology market. This dominance is unlikely to change in the near future, making Google and its many services a reliable revenue stream for Alphabet.

Another reason to consider buying Alphabet stock is the company’s generous profit margins. In the long run, Alphabet’s operating margins have often hovered in the 25-35% range, with a dip around the early COVID-19 crisis followed by a spike in the last two years.

Moreover, Alphabet’s cloud infrastructure business, Google Cloud, is showing potential for profitable long-term growth. While it currently trails behind rivals like Amazon Web Services, it’s growing quickly with revenue up 38% to $6.9 billion in its most recent quarter. Additionally, the division’s negative operating margin narrowed from -14% to -10% in the third quarter, suggesting a path to profitability. While it may never be as profitable as AWS or Azure, it should eventually become a significant contributor to Alphabet’s bottom line.

Lastly, Alphabet’s other bets, such as Waymo, its autonomous vehicle division, and life sciences projects, could potentially pay off over the years. These businesses give Alphabet a long-term flexibility that’s worth its weight in gold. While they have lost over $20 billion in the last five years and brought in little revenue, any breakthroughs in these areas could have a significant impact on the company’s bottom line. One day, I’m sure the Google name will fade away as new technologies and as-yet unheard-of rivals undermine the traditional web search and advertising operation. In its place, one or more of today’s or tomorrow’s “other bets” will take over, letting Alphabet investors forget about the Google name and still feel good about the company’s future.

Despite the recent market sell-off and concerns about the economy, Alphabet’s dominance in search, huge profit margins, potential for growth in Google Cloud and other bets, make it a strong buy for long-term investors. And the stock trades at a very reasonable 18 times earnings, giving value investors something to chew on, too.

FAANG buy 2: Amazon

E-commerce giant Amazon took a deeper dive than Alphabet in 2022. The stock is off to a strong start this year, but still trails Alphabet’s returns since the end of 2021 with a 41% dip. This price cut had its reasons, and you need to weigh these bearish arguments before putting your money to work in Amazon stock.

The primary pressure point for Amazon is competition. The company used to have a solid first-mover advantage and be the only game in town, but many old-school retailers have stepped up their online sales to offer tougher competition. This has made it difficult for Amazon to maintain its torrential growth rates and dominant market share. While Amazon still rules the American e-commerce space with a 38% market share, Walmart (WMT 0.33%) has a 30% share of the e-commerce grocery space, according to Euromonitor data. This is an important segment and Amazon has struggled to gain a foothold here.

Furthermore, Amazon has invested heavily in its physical logistics network that gives it delivery advantages over traditional retailers. This has come with significant costs, including increases in net shipping costs and fulfillment costs. These infrastructure expenses now represent 16.8% of sales.

However, there are also many reasons for optimism around Amazon’s business and stock.

The Amazon Web Services (AWS) cloud computing platform has long been Amazon’s primary source of profitability on the segment level, and it also continues to drive the company’s top-line growth. AWS’s revenue jumped 27% in the third quarter, and year-to-date operating profits of $17.3 billion are 33% higher year over year.

So Amazon’s stock had a rough year, but the sharp price drop looks like an overreaction. The company’s dominance in the e-commerce space, profitability from AWS, and potential for robust growth in cloud computing make Amazon stock a strong buy for long-term investors.

The FAANG stock to stay away from: Meta Platforms

Meta’s core advertising business stalled out for a few reasons last year, including Apple’s iOS update with new restrictions to advertisers’ ad-tracking efforts, the rise of TikTok and its competition with Instagram, and the macroeconomic headwinds affecting the broader advertising market. So Meta’s operating margins are running at multiyear lows and the stock is down 59% over the same year-and-change period as Alphabet’s and Amazon’s slightly smaller drops.

To counter TikTok, Meta aggressively invested in the expansion of Instagram Reels, but warned that monetizing those short videos would be more difficult than its Feed-based ads. However, instead of streamlining its business to offset those costs, Meta doubled down on expanding its Reality Labs segment, which houses its virtual reality products. That effort is off to a rocky start. The Reality Labs segment’s revenue rose less than 3% YoY to $1.4 billion in the first nine months of 2022 while its operating loss widened from $6.9 billion to $9.4 billion.

This painful combination of slowing growth and rising expenses has driven away investors, with analysts expecting a 2% drop in revenue and a 33% lower earnings for 2022. In 2023, Wall Street expects a 5% rise in revenue and 15% drop in earnings as expenses continue to climb. It’s also worth noting that Meta’s insiders sold nearly four times as many shares as they bought over the past 12 months.

Slowing sales, dropping profits, weak insider trading, and an unconvincing response to surging competition are not qualities I look for in prospective investments. Meta has work to do before I would consider buying or recommending this stock, starting with a clearer response to the TikTok challenge. Until then, I’ll gladly stay on Meta’s sidelines.

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. Suzanne Frey, an executive at Alphabet, 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. Anders Bylund has positions in Alphabet, Amazon.com, and Netflix. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Meta Platforms, Netflix, and Walmart. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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