To The Moon

FAANG stocks are a big reason why the $S&P 500(.SPX)$ is now in a bull market.The so-called FAANG stocks refer to the following five large US technology stocks:

$Meta Platforms, Inc.(META)$ $Apple(AAPL)$ $Amazon.com(AMZN)$ $Netflix(NFLX)$ $Alphabet(GOOG)$

The reason why FAANG stocks are popular is that they have outperformed the market by a large margin over a long period of time. In the past 10 years (as of June 8, 2023), the return rate of the $S&P 500(.SPX)$ was 161%, and the returns of $Netflix(NFLX)$ , $Apple(AAPL)$ , $Meta Platforms, Inc.(META)$ , $Amazon.com(AMZN)$ and $Alphabet(GOOG)$ were as high as 1200% and 1040% respectively during the same period , 1040%, 800% and 460%.

However, each of the FAANG stocks’ valuation levels are also very different. Based on PCF ratio (stock price/cash flow per share) for analysis, the order of FAANG stocks from cheap to expensive is:

Price-to-Cash Flow (P/CF) Ratio? Definition, Formula, and ...

1. $Meta Platforms, Inc.(META)$: Price-to-Cash Flow (P/CF) Ratio (expected cash flow in 2024) is 10.1

Although the META’s price has rebounded sharply from its 2022 lows, social media stock Meta Platforms is still the cheapest of the FAANG stocks according to the dynamic Price-to-Cash Flow indicator.

Zuckerberg, the company's CEO, had bet big on the Metaverse, but after mounting losses at Metaverse unit Reality Labs, compounded by a drop in ad income, eventually prompted Meta to cut its 2023 capex forecast by $5 billion at the midpoint.

The move will significantly boost the company's cash flow. At the same time, Meta still holds the most valuable social media platform in the world. The company's four key assets Facebook, WhatsApp, Instagram and Facebook Messenger had more than 3.8 billion monthly active users in the Q1 2023. Therefore, Meta has super advertising pricing power.

2. $Amazon.com(AMZN)$ : Dynamic P/CF Ratio of 12.7

Amazon stock now trades at a dynamic P/CF ratio of 12.7, compared to a P/CF ratio of 23 to 37 during the 2010-2020 period. Although the company is the world's largest online retail platform, its most important source of cash flow is the cloud infrastructure service Amazon Web Services (AWS).

According to data from Canalys, AWS accounted for 32% of global cloud service spending in the first quarter. Plus, cloud services are more profitable, with AWS contributing a sixth of Amazon's net sales but 50% to 100% of its operating profit. So as long as AWS, subscription services, and advertising services continue to grow at double-digit rates, Amazon's cash cow status will not be shaken.

3. $Alphabet(GOOG)$ : Dynamic P/CF Ratio of 13.5

Alphabet's Class A shares currently trade at 13.5 times the company's expected 2024 cash flow, lower than the 18.3 average over the past 5 years. The company owns Internet search engine Google, video platform YouTube and self-driving car company Waymo.

Since the first quarter of 2015, Google's share of the global search market has not been lower than 90% every month, so advertising pricing power is very large. In addition, YouTube short videos currently have more than 50 billion daily views. Meanwhile, Google Cloud accounts for 9% of the global cloud infrastructure services market, and turned profitable year-on-year in the March quarter.

4. $Apple(AAPL)$ : Dynamic P/CF Ratio of 22.7

From 2013 to 2018 so far, the P/CF Ratio of the world's largest listed company Apple's stock is between 7.5 and 13.9, and it is now close to 23, which is not cheap.

Moreover, the company's net sales in fiscal 2023 are expected to decline, with Mac revenue falling 30% in the first six months and iPhone sales of $5.1 billion, down from a year earlier. Fortunately, Apple is the most valuable brand in the world, its customers are loyal, and the company has repurchased approximately $586 billion in common stock over the past 10 years.

5. $Netflix(NFLX)$ : Dynamic P/CF Ratio of 30.1

Among the FAANG stocks, Netflix stock has the highest P/CF Ratio, mainly due to the company's international expansion.

The company's adjusted profit is not low, and at the same time, it has raised its free cash flow forecast for 2023 by US$500 million, but management has spent a lot of money over the years, and operating cash flow is still in the process of catching up with market value.

Additionally, Netflix's moat is not as wide compared to other FAANG stocks. Traditional media companies do not lack money. Although many companies do not make money in their streaming business, they will not give up this market easily.

As of June 14th