1 FAANG Stock to Buy Hand Over Fist in April and 1 to Avoid Like the Plague

The FAANG stock investors can buy hand over fist in April: Amazon

Among the five FAANG stocks, the one that stands out as the best value in April is e-commerce kingpin Amazon.

Like every single stock on the planet, Amazon has headwinds and risks it’s contending with, the most prominent being the growing risk the U.S. economy will fall into a recession at some point in the not-too-distant future. Since a majority of Amazon’s revenue is generated from retail sales, the inference is that the company could struggle if consumers pare back their discretionary spending.

However, there’s a pretty sizable flaw with using retail weakness as an excuse to avoid Amazon. Despite the online marketplace being Amazon’s primary revenue driver, it doesn’t play a particularly important role in cash-flow generation or operating income. Even if Amazon’s e-commerce division sees sales reverse, the company’s operating cash flow can sustain double-digit growth as long as a trio of ancillary operating segments continue to fire on all cylinders.

Although Amazon’s online marketplace isn’t paramount to profits, the Prime memberships the marketplace helps lure certainly are. Two years ago, Amazon announced that it had surpassed 200 million global Prime subscribers. As of the end of 2020, the company was generating $28 billion in annual run-rate sales from subscriptions.

Since then, the price of a Prime membership has increased, and Amazon gained the rights to Thursday Night Football. Subscription services is now a $37 billion segment on an annual run-rate basis. In other words, the company’s global Prime member count is likely well above 200 million.

Advertising services is the second key segment for Amazon. While it’s not in the same class as Alphabet or Meta when it comes to driving advertising revenue, Amazon is netting well over 2 billion visits on a monthly basis. That’s more than enough of a dangling carrot to put ad-pricing power in Amazon’s court. Despite the challenging growth environment in 2022, Amazon’s ad services segment delivered quarterly year-over-year sales growth ranging between 21% and 30%, sans currency movements.

The third ancillary division — and the one that’s arguably most important to Amazon’s cash flow — is Amazon Web Services (AWS). AWS has gobbled up 32% of global cloud infrastructure service market share, which is excellent news considering enterprise cloud spending is still in its early innings of growth. Best of all, AWS’s exceptionally high margins provide anywhere from 50% to 100% of Amazon’s annual operating income, even though AWS only accounts for about a sixth of the company’s net sales.

Based solely on the traditional price-to-earnings ratio, Amazon isn’t much of a looker. But it doesn’t make a lot of sense to use a traditional valuation metric to assess a company that reinvests the vast majority of its operating cash flow.

Throughout the 2010s, investors willingly paid between 23 and 37 times year-end cash flow to own shares of Amazon. Investors buying shares of Amazon in April are paying approximately 13 times Wall Street’s consensus cash flow for 2023 and just 7 forecast cash flow for 2026. On the basis of cash flow, Amazon stock is cheaper than it’s ever been.

The FAANG stock to avoid like the plague in April: Apple

However, there are two sides to every coin. While tech stock Apple is a phenomenal business, it’s this month’s FAANG stock to avoid for a variety of reasons.

Let’s state the obvious: Apple isn’t a train wreck. There’s a reason it’s Warren Buffett’s top holding at Berkshire Hathaway and the largest publicly traded company by market cap in the United States. In calendar year 2022, Apple generated more than $109 billion in operating cash flow.

Apple’s capital-return program is also the envy of pretty much every publicly traded company. It’s repurchased in excess of $550 billion worth of its common stock since the beginning of 2013 — that’s more than the market caps of all but seven S&P 500 companies, which includes Apple — and is parsing out nearly $14.6 billion in dividends annually.

In other words, if you’re holding on to Apple for five or more years to come, there’s a pretty good chance your initial investment will grow in value. But if you’re looking for a market-topping return or a deal, don’t expect to find it here.

The allure of Apple has long been its supercharged growth prospects for a mega-cap company. Unfortunately, that’s not what investors are getting right now. Mediocre sales following the launch of iPhone 14 coerced Apple to pull back on plans to expand production in September. Even though the company is strongly promoting fast-growing subscription services, physical products like the iPhone generate a majority of its sales.

What makes the iPhone 14’s so-so sales performance even more painful is that Apple has historically seen high inflation as a tailwind. Despite inflation pacing between 6% and 9% for much of the past year, Apple’s full-year revenue for fiscal 2023 is expected to decline by 1%, according to Wall Street.

To add fuel to the fire, Apple has relied on its mammoth share repurchase program to provide a boost to its earnings per share. Even with ongoing share buybacks, Apple’s earnings per share is expected to decline by 2% in fiscal 2023. In short, none of the tools that have fueled Apple’s outperformance in the past are on pace to help its top or bottom line grow in 2023.

During bear markets, it’s normal for investors to be more critical of company valuations. Following last week’s strong performance for the broader market, Apple is commanding a multiple of 25 times forward-year earnings despite its lack of growth in the current fiscal year. Compare this figure to the multiple of 10 to 15 times forward-year earnings Apple consistently traded at from 2013 through 2018, and you’ll see just how pricey Apple is in the current environment.