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2 FAANG Stocks to Buy and 1 to Avoid in 2022

Wall Street delivered another winning year in 2021. The benchmark S&P 500 rocketed higher by 27%, which is more than double its average annual total return of 11% (including dividends) dating back to 1980.

But if you've owned the FAANG stocks for any significant length of time, you're used to handily outpacing the broader market. The FAANG stocks are:

  • Meta Platforms (NASDAQ: FB), the parent company of Facebook (the "F" in FAANG)
  • Apple (NASDAQ: AAPL)
  • Amazon (NASDAQ: AMZN)
  • Netflix (NASDAQ: NFLX)
  • Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the parent company of Google (the "G" in FAANG)

The FAANG companies are fast-paced, profitable businesses that have exhibited sustained competitive advantages over a long period of time.

Image source: Getty Images.

But in 2022, only two stand out as excellent buys. Meanwhile, one popular FAANG stock should be actively avoided this year.

FAANG stock No. 1 to buy: Amazon

In the traditional sense of the word, e-commerce giant Amazon isn't cheap. But based on its undisputed leading 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 are familiar with 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 U.S. last year. That's more than 34 percentage points higher than the next-closest competitor.

However, online retail sales generally yield razor-thin margins. To counteract this, Amazon has turned to its annual Prime membership. Members receive a number of perks, including free two-day shipping and access to Amazon's vast content library. In return, the company gets high-margin subscription revenue that helps buoy margins and allows it to undercut brick-and-mortar retailers on price. It also doesn't hurt that Prime members spend more with Amazon and stay within its product and service ecosystem.

What investors might not realize is that Amazon is also the kingpin of cloud infrastructure spending. Amazon Web Services (AWS) brought in nearly a third of all global cloud infrastructure revenue in Q3 2021. Cloud infrastructure growth is still in its early innings, and more importantly, the margins associated with cloud services are substantially higher than online retail margins. Thus, even as Amazon's e-commerce growth slows a bit, the segments that provide the biggest operating cash flow boost -- such as AWS, subscriptions, and advertising -- are seeing steady double-digit growth.

Between 2010 and 2020, Amazon vacillated between a year-end cash flow multiple of 23 to 37. If the company were simply to maintain the median of this cash flow multiple (30) that Wall Street and investors have been comfortable paying for over a decade, shares could reasonably reach $10,000 by mid-decade.

Image source: Getty Images.

FAANG stock No. 2 to buy: Meta Platforms

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

Even though Meta officially changed its name from Facebook in late October, there's no question where the lion's share of revenue for the company still originates: advertising.

Based on the company's third-quarter operating results, 2.91 billion monthly active users visited Facebook in Q3, with another 670 million unique users heading to Instagram and/or WhatsApp each month. Combined, we're talking about 3.58 billion people, or more than half the world's adult population, interacting with a Meta-owned asset each month. There's simply no platform around that allows advertisers to reach so many eyeballs, which is why Meta enjoys such incredible ad-pricing power.

Yet, as I've previously noted, Meta hasn't come close to fully monetizing its core assets yet. Even though it likely generated more than $100 billion in ad revenue last year, nearly all of this came from Facebook and Instagram. Assuming Facebook eventually pulls monetization levers on WhatsApp and Facebook Messenger, it'll be able to drive additional sales and profits to an already fast-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 is aiming 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 not often you can find a company near a $1 trillion market cap that's continuing to grow by approximately 20% on annual basis and is valued at roughly 24 times earnings for this year. Meta looks like an absolute bargain.

Image source: Apple.

The FAANG stock to avoid in 2022: Apple

For about as long as I can recall, streaming content provider Netflix has been my FAANG to avoid. The company's history of aggressive spending and cash outflows, along with growing competition, has made it the logical FAANG to shy away from. 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 to come. The iPhone is a leader in the U.S. smartphone space, and the company has some of the most loyal customers in the world, as evidenced by the lines that wrap around its stores anytime a new product debuts.

Also, Apple has been benefiting from sustained double-digit growth in services revenue, which should help lift margins over time and eliminate the revenue lumpiness that occasionally accompanies product replacement cycles. With the company reporting $104 billion in trailing-12-month operating cash flow, it's one of those stocks investors buy and tuck away for a while.

However, 2022 could be a far more challenging year for the world's largest publicly traded company. For instance, the rollout of 5G wireless infrastructure has already encouraged a lot of people to upgrade their iPhones and other wireless devices to take advantage of faster wireless download speeds. This suggests Apple will be up against some very difficult year-over-year comps.

Additionally, the Federal Reserve has signaled its intent to begin raising interest rates in 2022, as well as fully wind down its quantitative easing program. This is a recipe for lending rates to bounce off their historic lows. I mention this because Apple has been known to issue low-interest debt to fund its share repurchase program. There's a real possibility that Apple's future share buybacks could shrink a bit as borrowing rates becomes less favorable.

But the icing on the cake, at least for me, is Apple's valuation. Wall Street is only expecting sales growth of 4% this year and 5% in fiscal 2023, yet the stock is valued at a lofty multiple of 32 times earnings in 2022. Excluding share buyback activity, Apple's earnings might even be flat or down in fiscal 2022. It's simply not attractively valued at the moment.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. 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, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors.

Sean Williams owns Amazon and Meta Platforms, Inc. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Meta Platforms, Inc., and Netflix. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.


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