Technology stocks have ruled the last two decades. The major tech companies began the internet decade as start-up stocks and have grown to trillion-dollar valuations. Over the last few years, “FAANG” stocks--Facebook, Inc. (FB), Amazon.com, Inc. (AMZN), Apple Inc. (AAPL), Netflix, Inc. (NFLX), and Alphabet Inc’s Google (GOOGL)--have risen to prominence. These companies have risen to unprecedented heights and they continue to dominate their respective markets.
The COVID-19 pandemic has triggered internet adoption on a much wider scale than previously. The tech-heavy Nasdaq Composite Index surged 46.35% in 2020. But, for comparison, the FAANG components of the index have returned 28.2%, 69.8%, 77.6%, 65.9% and 32.1%, respectively, on the back of their robust offerings, sound business models, and strong earnings. In addition, all the five stocks easily outperformed the broader market SPDR S&P 500 ETF Trust’s (SPY) 18.3% returns in the same period.
The mass distribution of effective coronavirus vaccines and anticipated economic recovery this year may not abate this tech rally anytime soon. Though many investors are shifting out of tech stocks into non-tech stocks that have turnaround potential, an ongoing developmental wave of artificial intelligence (AI), 5G network, cloud computing and virtual reality is expected to continue in the coming years, driving the performance of FAANG stocks. Here are how these stocks are positioned for this year:
Apple Inc. (AAPL)
AAPL is the largest American company and one of the biggest names in the consumer technology market globally. It designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide. The company also deals in software, services, accessories, networking solutions, and digital content and applications. It operates primarily via two segments – Products and Services.
Over the past three years, AAPL’s revenue, EPS and free cash flow have grown at a CAGR of 6.2%, 12.5% and 15%, respectively. In its last reported quarter ended September 30, 2020, the company posted record revenue of $64.7 billion, led by record Mac sales and Services. International sales accounted for 59% of its top line. AAPL generated $18.7 billion in free cash flow, growing 9.7% year-over-year. Its EPS came in at $0.73, compared to a year-ago value of $0.76.
AAPL is consistently innovating by introducing next-generation products. The company has a healthy balance sheet and a strong business model. This bodes well for the current year because the company’s service segment is the fastest-growing and highest-margin segment. Moreover, Wall Street analysts expect AAPL’s current quarter revenue and EPS to rise 15.3% and 22%, year-over-year, respectively.
How does AAPL stack up for the POWR Ratings?
A for Trade Grade
B for Buy & Hold Grade
B for Industry Rank
B for Overall POWR Rating.
It is also ranked #26 of 52 stocks in the Technology – Hardware industry.
Amazon.com, Inc. (AMZN)
AMZN is the world’s largest online retailer of consumer products and service subscriptions through its online store. In addition to being a market leader in the cloud computing segment, AMZN has also ventured into other spaces recently, including the healthcare segment with the launch of Amazon pharmacy. AMZN also manufactures and sells devices such as Kindle, Fire tablets, Fire TVs, Rings, and Echo. The company operates through three segments – North America, International, and Amazon Web Services (AWS).
AMZN has been implementing robust expansion strategies to increase its market reach, including developing its transportation fleet. On December 22, it announced plans to open its first fulfillment center in Carencro, and two new fulfilment centers and a new delivery station in Texas. The company also recently announced its first-ever purchase of Boeing (BA) 767-300 aircraft, expanding its fleet to continue to serve customers faster. AMZN purchased eleven aircraft from Delta Air Lines (DAL) and WestJet Airlines to join the Amazon Air cargo network in 2021 and 2022. And on December 15 it signed a multi-year deal with Twitter (TWTR) to provide global cloud infrastructure to deliver Twitter timelines.
AMZN’s revenue and EPS grew at a CAGR of 29.3% and 105.8%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 59.6%. Its total net sales increased 37% year-over-year to $96.15 billion in the third quarter ended September 30, 2020. Online stores generated $48.35 billion in revenues, rising 37% year-over-year, while the AWS segment witnessed 29% growth, contributing $25.2 billion to the top-line. Moreover, its EPS came in at $12.37, nearly tripling the year-ago value of $4.23.
The e-commerce giant stated that it has spent more than $10 billion in pandemic-related operating costs, which included floor space expansion to boost its fulfillment and logistics efforts by 50%. Moreover, AWS gained significant customer momentum with new commitments and migrations, thanks to pandemic. In fact, it has emerged as one of the top-three largest cloud computing companies and is poised to expand further into the Indian and European markets. As a result, the company’s current-year revenue and EPS is expected to grow 18.4% and 30.2%, respectively, ear-over-year.
AMZN’s POWR Ratings reflect a promising outlook. It has been accorded a “B” for Buy & Hold Grade and Industry Rank. Among the 69 stocks in the Internet industry, it is ranked #34.
Alphabet Inc. (GOOGL)
GOOGL well known for its search engine and brand advertising services worldwide. The company operates through Google and Other Bets segments and offers products such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. The Other Bets segment includes businesses that include Access, Calico, CapitalG, GV, Verily, Waymo, and X, as well as internet and television services.
GOOGL recently announced the addition in coming weeks of App Store privacy labels to its Google applications using the iOS operating system from AAPL. The new policy requires developers to disclose how data is collected from App Store users and used to track them.
The company is expected to invest in India’s ShareChat along with Snap Inc. (SNAP). On December 22, GOOGL announced that it is investing in two Indian Startups — Glance and DailyHunt — representing a further push into the world’s second-largest internet market. Additionally, the company recently acquired Fitbit, strengthening its focus on wearables.
GOOGL’s revenue and EPS grew at a CAGR of 18% and 20%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 7.6%. GOOGL’s revenue for the third quarter ended September 30, 2020 grew 14% year-over-year to $46.17 billion. This growth was led primarily by an increase in advertiser spend in Search and YouTube as well as its continued strength in Google Cloud and Play. GOOGL’s EPS grew 62% year-over-year to $16.40.
GOOGL’s search engine made it the largest player in the internet ad space, an area where it remains by far the market leader. The company is rapidly expanding its data centers to increase its presence in the cloud space to help companies leverage edge computing and 5G. Its strong focus on AI and the home automation space should further aid its growth over the long term. Wall Street analysts expect GOOGL’s current quarter revenue and EPS to rise 21.2% and 18.8%, respectively, year-over-year, respectively.
GOOGL’s strong fundamentals are reflected in its POWR Ratings. It has a “Strong Buy” rating with an “A” in Trade Grade and Buy & Hold Grade, and a “B” in Industry Rank. Within the Internet industry, it is ranked #2 of 69 stocks.
Facebook, Inc. (FB)
FB develops products that enable people to connect and share content with friends and family through mobile devices, personal computers, virtual reality headsets, and in-home devices worldwide. The company's products include social media platform Facebook, Instagram, Messenger, and WhatsApp. It also provides the Oculus ecosystem, which allows people to connect with each other through virtual reality.
FB’s revenue, EPS and free cash flow grew at a CAGR of 29.4%, 19.4% and 0.3%, respectively, over the past three years. In the third quarter ended September 30, 2020, FB’s revenue increased 22% year-over-year to $21.47 billion, due primarily to a rise in the advertising revenues. Daily active users (DAUs) were 1.82 billion on average in September, representing an increase of 12% year-over-year. Its EPS came in at $2.71, rising 28% compared to the year-ago value.
FB is currently facing major headwinds. The New York State Attorney General has the company in her crosshairs with allegations that it has and continues to illegally stifle competition to protect its monopoly power. However, the company has the financial heft to fight potential antitrust lawsuits. Analysts expect the company’s current year revenue and EPS is expected to grow 23.9% and 12.3%, respectively, year-over-year.
Under our POWR ratings, FB has a “B” for Industry Rank. In the 69-stock Internet industry, it is ranked #35.
Netflix, Inc. (NFLX)
NFLX is widely known as a streaming giant due to its dominance in the sector. The company offers streaming services and engages in the internet delivery of TV shows and movies directly to TVs, computers, and mobile devices in the U.S..and internationally. The platform has more than 195 million global paid members.
The company’s focus on creating original content has been one of the key drivers of subscriber growth in the last decade. NFLX caters to a wide range of users and has invested heavily in developing content. It continues to invest heavily in local language content as part of its international expansion. However, the company has been facing a potential shortage of films and movies as production was suspended during the first half of 2020 as a result of the COVID-19 pandemic.
NFLX’s revenue and EPS grew at a CAGR of 29.8% and 83.6%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 24.4%. NFLX’s revenue for the third quarter ended September 30, 2020 grew 22.7% year-over-year to $6.44 billion. Its average streaming paid memberships rose 25%, while streaming ARPU decreased 1.6% year-over-year. However, growth has slowed, with 2.2 million net additions of paid members during the quarter compared to the year-ago net adds of 6.8 million. NFLX’s EPS grew 18.4% to $1.47.
As a pioneer media streaming company, NFLX has capitalized on consumers’ cord-cutting and pivot to OTT (over the top) platforms. NFLX is burning cash in the quest to fund its programming and reduce its dependence on outside studios, so its recent subscription price hike will boost its cash flow. The platform has a huge content pipeline for its fiscal 2021, with more than 27 original shows to be released in January alone. Wall Street analysts thus expect the current quarter revenue and EPS to rise 18.3% and 44.4%, respectively, year-over-year.
It is no surprise NFLX is rated a “Buy” in our POWR ratings system. It also has a “B” for Trade Grade, Buy & Hold Grade, and Industry Rank. Among Internet stocks, it is ranked 18th out of 69.
The FAANG stocks have been among the best-performing stocks of the past few years and have proved to be unstoppable regarding innovation. All five stocks still have plenty of growth potential. However, in our view, GOOGL is currently the best among the five.
GOOGL is considered a near-monopoly in online search and advertising. The company is regarded as a “Gatekeeper” of the internet due to its dominant market share in search, bolstered by being the default search provider for many browsers. As the number of smartphone users across the globe rises , GOOGL’s operating system android and other digital services are expected to explode.
Moreover, Google X’s diverse bets that range from Waymo (driverless cars) to Verily and Calico (life sciences) to Deepmind (Artificial intelligence systems) also present immense growth potential for the company. Hence, we believe GOOGL is likely to outperform its peers as well as the broader market in 2021.
AAPL shares were trading at $128.34 per share on Friday afternoon, down $0.57 (-0.44%). Year-to-date, AAPL has declined -3.28%, versus a 0.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.Which FAANG Stock is the Best Investment for 2021? appeared first on StockNews.com