Mirror, Mirror, on the Wall, Which Is the Cheapest FAANG Stock of Them All?

Irrespective of the performance of general stock market indicators, both experienced and novice investors have been drawn towards the FAANG stocks for over ten years.

When I mention "FAANG" stocks, I'm talking about:

The main explanation for the widespread ownership of these companies lies in their consistent outperformance over the long term and the competitive advantages they have within their respective industries.

Picture credit: Getty Images.

Regarding the latter, each of these five companies possesses distinct advantages or advantages that, up to this point, have proven to be unconquerable.

In terms of gains, these five companies – Apple, Netflix, Meta, Amazon, and Alphabet (Class A shares, GOOGL) – have significantly outperformed the major U.S. stock indexes. Looking at the past ten years up until July 13, their returns stand at approximately 1,150%, 1,120%, 1,110%, 773%, and 440% respectively. In contrast, the benchmark S&P 500 has only experienced a 168% increase during the same timeframe.

Here are five highly reputable companies, yet their valuations differ.

Which FAANG Is The Cheapest Based On Forward P/E?

While there are multiple methods to assess the value of stocks based on their fundamentals, the forward price-to-earnings (P/E) ratio is widely utilized. The forward P/E ratio is calculated by dividing the company's stock price by the projected earnings per share (EPS) for the next year, as estimated by analysts on Wall Street.

According to the collective earnings per share (EPS) predictions by financial experts on Wall Street for these firms in 2024, let's take a look at the present forward price-to-earnings (P/E) ratios for the FAANG stocks.

According to this traditional fundamental measure, Alphabet, which is the parent company of Google, YouTube, and Waymo, is considered to be the most economical among the FAANG stocks. Its forward-year earnings multiple is slightly below 20 times.

One interesting aspect of Alphabet is that it will keep profiting from its fundamental search engine, which is producing abundant cash flow, while also experiencing potentially swifter expansion rates from its supplementary sectors. These encompass its division dedicated to cloud infrastructure services, Google Cloud, as well as YouTube, the second most frequented social media platform after Facebook, owned by Meta.

Google Cloud presents a captivating opportunity for growth. In the quarter that ended in March, Alphabet's cloud infrastructure service division achieved its first-ever operating profit of $191 million. The field of enterprise cloud spending is still nascent, and the operating margin for cloud services outshines that of advertising.

Picture origin: Getty Images.

FAANG Stocks: Cash Flow, A Better Value Measure

Nevertheless, the conventional method of evaluating FAANG stocks based on projected earnings for the upcoming year may not be the most accurate approach. Although this metric is suitable for established companies, the FAANGs' tendency to reinvest a significant portion of their cash flow into their own enterprises suggests that assessing their value based on cash flow is a much more reliable indicator.

Based on Wall Street's predictions for the cash flow per share in the upcoming year, let's explore the ranking of FAANG stocks.

As you may observe, putting emphasis on the generation of cash-flow brings about significant changes. Netflix and Apple, although less expensive than Amazon based on projected earnings, prove to be excessively costly when taking into account their operational cash flow in comparison to Amazon. Surprisingly, considering its potential cash flow in the near future, Amazon is now more affordable than ever before as a company that is traded publicly.

However, when it comes to the most advantageous offer among the FAANGs, Meta Platforms outshines its counterparts by a significant margin. This might be unexpected, given that Meta's stocks have skyrocketed by over three times since reaching their lowest point during the bear market of 2022.

The main pillar of Meta's success remains its excellent presence on social media platforms. Facebook, Instagram, WhatsApp, and Facebook Messenger rank among the most popular apps worldwide. Threads seems to be on its way to joining this influential group, as it gained over 100 million members in just five days. Despite a noticeable decrease in Meta's social media user expansion, it remains the top choice for advertisers seeking access to a vast audience. Advertising accounts for a significant portion of Meta's earnings, contributing to slightly over 98% of its revenue in the first quarter.

The company's future prospects in virtual reality and the metaverse are highly stimulating as well. Meta introduced its blend of reality and virtual reality headset, the Quest 3, at the beginning of June. Additionally, its Reality Labs division has been investing enormous sums of money to establish itself as a gateway into the three-dimensional virtual world called the metaverse. Meta is fortunate enough to be able to make these investments for its future due to its substantial cash flow and considerable net-cash reserves.

Lastly, it's important to note that Meta has strategies in place that prioritize the interests of its shareholders. To address the significant operating losses experienced by Reality Labs last year, Meta has adjusted its projected expenditures for the entire company, reducing it by $5 billion at the midpoint. This, combined with the board's approval of a share buyback program worth up to $40 billion, could potentially enhance Meta's appeal to investors. Taking these steps allows Meta to demonstrate its commitment to effectively manage its resources and provide more value to its shareholders.

Suzanne Frey, an executive at Alphabet, serves on the board of directors for The Motley Fool. Randi Zuckerberg, the sister of Meta Platforms CEO Mark Zuckerberg, and a former director and spokesperson for Facebook, is also a member of The Motley Fool's board of directors. John Mackey, the former CEO of Whole Foods Market, which is owned by Amazon, is another member of The Motley Fool's board of directors. Sean Williams holds positions in Alphabet, Amazon.com, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Meta Platforms, and Netflix. The Motley Fool abides by a disclosure policy.