Motley Fool co-founder David Gardner has long embraced the mantra that winning stocks keep winning – and this has truly been the case for FAANG shares.
When I say “FAANG”, I am referring to the combination of:
Everyone is a winner if you have bought and owned the FAANG shares
If you believe the benchmarket S&P 500 or technically heavy Nasdaq Composite has been unstoppable since the market bottomed out after the Great Recession in March 2009, you should take a closer look at FAANG’s returns. With the exception of Facebook, which debuted as a public company nine years ago, here’s how FAANGs has fared relative to the S&P 500 and Nasdaq Composite since the bottom of the Great Recession on March 9, 2009:
- Facebook: Up 828% (since debut in 2012)
- Apple: Op 4,612%
- Amazon: Op 5.704%
- Netflix: Op 9.608%
- Alphabet: At 1,621%
- S&P 500: Op 543%
- Nasdaq Composite: Up to 1,054%
There really has not been a wrong answer among the FAANGs. Even if you chose Alphabet over Netflix, Amazon or Apple, you have an overperformance of almost 1,100% compared to the most followed benchmark stock index.
All FAANGs are leaders in their respective industries, they are first-class innovators, and with the exception of Netflix, they generate a mountain of cash flows on an annual basis. It also does not hurt that they are also household names, which has made them a popular destination for investment dollars.
But as we move into the second half of 2021, a FAANG stock stands out for its value relative to its high growth potential. If you buy this stock, my expectation is that it will surpass its peers over the next six months and perhaps well beyond.
Nr. 1 FAANG share to buy in the second half of 2021
While I’m a fan of four of the five FAANGs (sorry, Netflix, I’m not thrilled with the increasingly competitive landscape for streaming), the one I expect to surpass its peers is e-commerce giant Amazon. Before I explain how Amazon can be considered a “value”, as I have described it, you must first understand how incredibly dominant the company’s two core operating segments have become.
The first dominant segment that originally put Amazon on the map is its online retail market. Back in April, eMarketer estimated that Amazon’s share of US online retail would expand to 40.4% in 2021. By context, this is more than five times higher than its closest competitor, Walmart, which controls an estimated 7.1% of online retail. In fact, if you add # 2 to 10, Amazon’s share of US e-commerce retail sales would still be over 50% higher.
Admittedly, retail does not offer the best margins, and Amazon knows it. Therefore, it has pushed Prime memberships that come with perks like free / fast shipping and access to Amazon’s streaming platform.
So far, more than 200 million people worldwide have signed up for Prime. This is good news because Prime members are encouraged to spend more than non-Prime customers to get the most out of membership. Plus, the billions of dollars raised in Prime fees help buffer Amazon’s retail margins and ensure it undercuts its brick-and-mortar competitors in price.
The second source of dominance comes from cloud infrastructure services. With more companies than ever pushing online and moving data into the cloud, the demand for Amazon Web Services (AWS) storage and solutions has increased. While most companies struggled during the worst economic downturn in decades in 2020, AWS recorded full annual revenue growth of 30%.
According to estimates from Canalys, which relied on operating results in the first quarter from major cloud service providers, AWS raised DKK 13.5 billion. Dollar during the first quarter a share of 32% of worldwide cloud infrastructure spending. As cloud services generate far superior margins over retail or advertising, AWS has quickly become the primary operating revenue generator for Amazon, despite accounting for only one-eighth of total sales.
Amazon is heading towards a historically cheap rating
Now that you have a better idea of why Amazon is so unstoppable, it’s time to get into the matter – why it will surpass its FAANG peers over the next six months and probably far beyond.
Most investors are familiar with using price-to-earnings or price-to-book as a kind of measure of value. But these traditional basic metrics have never worked well for Amazon, primarily because outgoing CEO Jeff Bezos aimed to reinvest the majority of the company’s cash flow operations to grow the business. Thus, cash flow from price to operation has historically been a far more accurate measure of whether Amazon is relatively pricey or inexpensive.
What is particularly interesting about Amazon is that it has completed each of the last 11 years with a price-to-cash flow multiple of between 23 and 37. You will find similarly high cash flow premiums (albeit with different multiples) for Facebook and Alphabet. , as well.
Amazon has had a habit of abolishing Wall Street’s annual cash flow per capita. Share estimates for years. Based on the estimate for 2021, it is valued at a multiple of 26 times cash flow.
But where things will be interesting is in 2023 and 2024. The continued growth in online sales, higher advertising revenue and more importantly, the growth in AWS is expected to more than double the company’s operational cash flow.
If Wall Street’s consensus estimate of $ 314.20 in annual cash flow per. Stock turns out to be accurate, Amazon could be valued at $ 9,000 per share. Stock by 2024 and still be within its historical cash flow. None of the other FAANGs are expected to see their operational cash flow soar almost as much as Amazon in the middle of the decade.
Nominally, Amazon does not look like a value. But taking into account its dominance in retail and cloud infrastructure as well as its rapidly growing operational cash flow, it is the FAANG stock that clearly offers the most upside.
This article represents the author’s opinion, that may disagree with the “official” recommendation position for a Motley Fool premium advisory service. We are motley! Questioning an investment dissertation – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier and richer.