FAANG stocks represent some of the biggest technology companies in the United States, which have historically been some of the favorites of institutional and retail investors. These large-cap tech companies capitalized on the pandemic-driven disruption last year to boost their market presence significantly. Wedbush’s Dan Ives expects the recent federal crackdown against big techs in China to bolster the growth of tech stocks in the United States.
The tech industry is expected to grow at a 7% to 10% rate this year. Given this backdrop, fundamentally sound FAANG companies Apple Inc. (AAPL), Alphabet Inc. (GOOGL), and Facebook, Inc. (FB) are well-positioned to witness stable growth and, thus, are solid bets now.
However, similar to China, the Biden administration also plans to stimulate further competition and stop further consolidation in the U.S. tech industry, which may not bode well for Amazon.com, Inc. (AMZN). Also, the decelerating growth prospects of Netflix, Inc. (NFLX) amid intense competition in the OTT space could lead to the stock witnessing a downtrend. Thus, we think these two FAANG stocks are best avoided now.
Stocks to Buy:
Apple Inc. (AAPL)
AAPL is the maker of iPhones, iPads, and other products. It is also the first company to attain a $2 trillion market capitalization.
On September 1, AAPL announced that it would allow developers of ‘reader’ apps to link an external website to their apps, giving them greater operational flexibility. This decision was taken after the Japan Fair Trade Commission gave AAPL the green light to do so. The company is set to introduce changes to the App Store to make it a better marketplace for apps, thereby increasing AAPL’s revenue.
On August 30, AAPL acquired Primephonic, a classical music streaming service for its Apple Music platform. This should increase iTunes’ user base by gaining access to Primephonic’s customer base.
In the fiscal third quarter, ended June 26, AAPL’s total net sales increased 36.4% year-over-year to $81.43 billion. This can be attributed to a 49.8% year-over-year improvement in iPhone sales to $39.57 billion. In addition, the company’s net income came in at $21.74 billion, representing a 93.2% increase from the prior-year quarter, while its EPS rose 100% from the same period last year to $1.30.
A $1.23 consensus EPS estimate for the current quarter (ending September 2021) reflects a 68.5% year-over-year increase. Likewise, the $84.9 billion consensus revenue estimate for the fiscal fourth quarter indicates a 31.2% increase from the prior-year quarter. Also, AAPL has an impressive earnings surprise history as it has topped consensus EPS estimates in all four trailing quarters. The stock has gained 29.5% in price over the past year to close yesterday’s trading session at $156.69.
AAPL’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
AAPL has an A grade for Sentiment, and a B grade for Quality. In the 46-stock, B-rated, Technology – Hardware industry, it is ranked #23.
In total, we rate AAPL on eight different levels. Beyond what we’ve stated above, we have also given AAPL grades for Growth, Value, Momentum, and Stability. Get all the AAPL ratings here.
Alphabet Inc. (GOOGL)
The parent company of Google is one of the largest tech companies in the world. It is ranked #13 in the 2021 Forbes Global 2000 List.
On August 24, GOOGL started its Waymo One Trusted Tester Program in San Francisco, allowing customers to hail self-driving rides on the Waymo One app. This expansion of the self-driving service in the Bay area should promote GOOGL’s self-driving service nationwide.
For its fiscal second quarter, ended June 30, GOOGL’s revenue increased 61.6% year-over-year to $61.88 billion. The company’s income from operations improved 203.3% from the prior-year quarter to $19.36 billion. Its net income increased 166.2% from the same period last year to $18.53 billion, while EPS came in at $27.26, indicating a 169.1% year-over-year rise.
Analysts expect its EPS to increase 43.2% year-over-year to $23.48 in the current quarter (ending September 2021). The $63.22 billion Street revenue estimate for the current quarter indicates a 36.9% year-over-year rise. In addition, GOOGL beat consensus EPS estimates in each of the four trailing quarters. GOOGL’s stock has gained 82.5% in price over the past year and 64.6% year-to-date.
It’s no surprise that GOOGL has an overall B rating, which translates to Buy in our POWR Ratings system. In addition, it has a Sentiment grade of A, and a Quality grade of B. It is ranked #3 of 76 stocks in the Internet industry.
Click here to see the additional POWR Ratings for GOOGL (Growth, Value, Momentum, and Stability).
Facebook, Inc. (FB)
FB is the biggest social media company in the world. As the owner of WhatsApp, Instagram, and various other companies, FB has operations in numerous fields.
On September 1, FB started to roll out its Facebook Fantasy Games for Android and iOS users in the U.S. and Canada. The company plans to launch more games based on popular TV shows and sports leagues in the coming months. This venture into the digital gaming space should substantially boost FB’s revenues and earnings in the “new normal.”
On August 19, FB launched the open beta program of Horizon Workrooms, a virtual workspace on the Oculus Quest 2 platform. This new Virtual Reality innovation will likely prove highly beneficial as most companies adopt a hybrid work structure.
FB’s revenue improved 55.6% year-over-year to $29.08 billion in its fiscal second quarter, ended June 30. The company’s operating margin rose 11 percentage points from the prior-year quarter to 43%. Its net income and EPS increased to $10.39 billion and $3.61, respectively, up 100.7% and 100.6% year-over-year.
The Street’s $3.17 EPS estimate for the current quarter (ending September 2021) reflects a 17% year-over-year increase. Likewise, the $119.31 billion consensus revenue estimate for the current year (fiscal 2021) indicates a 38.8% increase from the prior year. Moreover, FB has topped consensus EPS estimates in each of the trailing four quarters. The stock has gained 39.9% in price year-to-date to close yesterday’s trading session at $382.18.
FB’s POWR Ratings reflect this promising outlook. The stock has an overall B rating. FB has an A grade for Quality, and a B grade for Sentiment. It is ranked #6 in the Internet industry.
To see additional POWR Ratings for Growth, Value, Momentum, and Stability for FB, click here.
Stocks to Avoid:
Amazon.com, Inc. (AMZN)
AMZN is a renowned e-commerce behemoth with a global market presence. Over the years, AMZN has acquired multiple companies, including IMDb, Audible, Zappos, Whole Foods Market, and more.
Recently, AMZN opened a Career Center and two delivery stations in the Hampton Roads area in Virginia to create more jobs in the area and speed up deliveries. However, this venture will take some time to be fruitful. AMZN has pledged to spend $700 million on job creation, but that spending is not expected to happen before 2025.
On September 3, AMZN announced that it would redeem $1 billion of its outstanding senior notes. In the ultra-low interest-rate environment, premature repayment of debt might indicate inefficient use of cash reserves.
In its second fiscal quarter, ended June 30, AMZN’s total net sales increased 27.2% year-over-year to $113.08 billion. However, its total operating expenses increased to $105.38 billion, indicating a 26.9% rise from the same period last year. Its net cash provided by operating activities declined 38.3% from the prior-year quarter to $12.72 billion.
Analysts expect EPS to decrease 27.2% year-over-year to $9.01 in the current quarter (ending September 2021) and 9.9% year-over-year to $12.7 in the next quarter (ending December 2021).
AMZN’s POWR Ratings are consistent with this bleak outlook. It has a D Value grade. It is ranked #21 of 76 in the Internet industry.
Click here to see additional POWR Ratings for AMZN (Growth, Momentum, Stability, Sentiment, and Quality).
Netflix, Inc. (NFLX)
NFLX operates as a premium streaming platform for movies, TV shows, documentaries, etc. The company has more than 200 paid memberships in more than 190 countries.
In a second-quarter earnings shareholder letter, NFLX stated that the pandemic has slowed down its membership growth due to content production slowdowns and delays because of pandemic-related restrictions. NFLX’s revenue increased 19.4% year-over-year to $7.34 billion in its fiscal second quarter, ended June 30. However, the company’s operating income declined 5.7% sequentially to $1.85 billion. Its net income decreased 20.7% sequentially to $1.35 billion, while EPS fell 20.8% from the prior quarter to $2.97.
A $1.10 consensus EPS estimate for the next quarter (ending December 2021) indicates a 7.6% year-over-year decline. Moreover, NFLX has missed consensus EPS estimates in three of four trailing quarters.
The stock is ranked #17 of 76 stocks in the F-rated Internet industry. To see more of NFLX’s component grades, click here.
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AAPL shares were trading at $154.93 per share on Wednesday afternoon, down $1.76 (-1.12%). Year-to-date, AAPL has gained 17.31%, versus a 21.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...
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