In 2022, economic uncertainty sent S&P 500 And this Nasdaq Composite Throw in a bearish market, and all five FAANG stocks delivered their worst performance in more than a decade. The silver lining for that situation is that a new bull market will eventually erase the losses incurred by both indexes, and many FAANG stocks are well positioned to rebound when that happens.
Here’s one FAANG stock to avoid and one to buy now.
FAANG stocks to avoid
meta platform (meta -2.12%) is the clear leader in social media. Facebook, Instagram, and WhatsApp are three of the four most popular social apps on the planet, and their ability to engage users has made Meta the second largest digital advertiser. But its recent financial results exposed cracks in the business that should give investors pause.
In the fourth quarter, Meta reached nearly 3 billion daily active users across its family of apps, and CEO Mark Zuckerberg said more people are using Facebook, Instagram and WhatsApp on a daily basis than ever before. Still, Meta saw a 4% decline in advertising revenue in the fourth quarter, and a 52% year-over-year decline in earnings. To be fair, macroeconomic headwinds certainly played a role in those disappointing results, but investors should still pay attention to two problems.
First, Meta failed to generate ad revenue despite reaching a record number of daily active users, meaning apps like Facebook and Instagram are losing their allure as rivals like ByteDance’s TikTok rise in popularity. Additionally, if Meta already reaches 3 billion people each day, investors have to wonder whether its social apps are nearing saturation. In any case, Meta will struggle to grow its advertising business at a meaningful pace in the years ahead.
Second, Meta saw its profits cut in half last year due to mounting losses from Reality Labs, the segment of its business focused on building Metaverse technologies. Investors have to wonder how quickly Meta can grow that segment, especially since Reality Labs’ revenue fell 5% last year to $2.2 billion, while its operating loss reached a record $13.7 billion.
Here’s the big picture: Meta is facing headwinds in its advertising business, and Reality Labs is burning cash at a record pace. This portends more difficult days ahead, hence investors should avoid the stock for the time being. This does not mean that shareholders should sell. If Meta succeeds in its grand ambitions, it will surely be worth a lot in the future. But I’ll wait for a bit more clarity on whether the company can accelerate growth again before starting (or adding) to a position in the stock.
FAANG stocks to buy
Netflix (NFLX -4.18%) faces economic headwinds in 2022. The company reported its first customer loss in more than a decade during the first quarter, as high inflation led to a shift in consumer spending. Meanwhile, unfavorable foreign exchange rates due to a stronger US dollar impacted growth throughout the year. For example, while Netflix reported only 2% growth in fourth-quarter revenue, its top line grew 10% in constant currency.
Fortunately, economic adversity is a temporary problem, and the fourth-quarter report included some positive updates for investors. First, Netflix topped Wall Street’s consensus with 4% subscriber growth, thanks to the successful launch of its ad-supported streaming service. Second, Netflix launched a paid sharing product designed to prevent password sharing. For context, management believes 100 million households access content without paying and monetizing even a fraction of those households could significantly increase its subscriber base, which currently stands at 230 million.
More broadly, Netflix leads the streaming industry in terms of engagement due in large part to its content leadership. Last year, Netflix accounted for 13 of the top 15 streaming series and five of the top 15 streaming movies. Nielsen, It is also noteworthy that Netflix was the second most downloaded entertainment app in 2022 (after TikTok). This information points to a strong competitive position in the still nascent streaming industry.
According to Omdia, consumer spending on subscription video services will grow 7% annually to reach $118 billion by 2027, while online video advertising spending will grow 14% annually to reach $362 billion during the same period. Given its brand authority and the recent launch of its ad-supported tier, Netflix is well positioned to capitalize on both trends.
Currently, shares trade at 5.2 times sales, a discount compared to the five-year average of 8.4 times sales. That’s why this FAANG stock is a buy.
Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Trevor Genevine has no position in any of the stocks mentioned. The Motley Fool posts and recommends Meta Platforms and Netflix. The Motley Fool has a disclosure policy.