Nearly a year in review part 2: the future for the FAANGS

Growth stocks have been out of favour all year, the Nasdaq Composite is down 33% this year, something that seemed unthinkable a few years ago, when unicorns were seen as the future. Cathy Woods’ ARKK fund has shed more than $50bn in assets this year, which is another sign of how quickly investors have ditched tech and growth stocks in 2022. Woods’ flagship fund still has $6.4bn in AUM, and has actually attracted an extra $1.4bn in new client money this year. So, are tech stocks the bargain of the century?

Here are the FAANGs in numbers for 2023:

Peak to trough declines in 2022:

Meta: -73%

Apple: -28%

Amazon: -50%

Netflix: -72%

Alphabet: -43%

So, have these stocks priced in all of the bad news? Afterall, they are still some of the biggest companies in the world with the widest consumer and user reach. One way to see if the tech giants will be in demand next year is to look at their P/E ratios and assess if they are cheap enough to attract buyers. Will the battered growth stocks of 2022 become the value stocks of 2023?

P/E ratios:

Meta: 11.04

Apple: 21.64

Amazon: 84.15

Netflix: 31.08

Alphabet: 17.20

Exxon: 8.37

Chevron: 9.36

As you can see, on a P/E ratio basis, the FAANGs don’t look particularly cheap versus the US oil majors right now. This is mostly due to cyclical factors: the FAANGs have struggled this year while the oil majors have raked in record profits. Another way to compare the tech giants is to look at net profit margin. Considering that inflation is expected to remain sticky throughout 2023, companies that can maintain the highest net profit margins will remain in high demand, especially in Q1 and Q2 next year.

Gross profit margin: 2022 FY estimated

META: 80.1%

Apple: 43.3%

Amazon: 43.6%

Netflix: 39.4%

Alphabet: 66.2%

As you can see, the gross profit margins for the FAANGs remain at a high level even if revenues have fallen. The problem in 2022, was that revenue declines were severely punished, which caused a large amount of the share price decline for these companies. However, Alphabet and Apple remain extremely attractive at the current price. While Meta has a low P/E and a high gross profit margin, its plans for the Metaverse remain challenging for investors as it could become a money pit and there is nothing to suggest that it will be a success. This is why it’s not one of our FAANG picks for 2023.

Instead, in our view Alphabet and Apple could be the recovery picks for 2023. They are both solid companies, world leaders and have enough reserves and sensible leadership to thrive in 2023 once the focus shifts to tech giants once more. Amazon could be challenged by the expected downturn in consumer retail next year and the streaming sector is overcrowded, which could limit Netflix upside in the long term, even if its share price has recovered in recent weeks.

Thus, as you can see, the FAANGs aren’t in the gutter, even if their stock prices have had a torrid time in 2022. Savvy investors will come back, even if some recover faster than others.