FAANG stocks (Facebook, Apple, Amazon, Netflix and Alphabet) are popular with retail investors. And for good reason. Over the last decade, all five of these companies have grown substantially and delivered big gains for investors in the process.
Personally, I think owning a selection of FAANGs is a great idea. That said, I wouldn’t buy all five for my portfolio today. I’d only buy these three.
The first FAANG stock I’d buy for my portfolio today is iPhone maker Apple (NASDAQ: AAPL). It’s currently trading about 15% below its all-time highs.
Apple, in my opinion, is a world-class company. Not only does it consistently generate growth, but it also generates a high level of profitability. Additionally, it has a strong competitive advantage due to its brand power and ecosystem.
While Apple sports a market-cap of $2trn+, I believe the company has the potential to grow larger over time. Looking ahead, it plans to be a major player in both healthcare and autonomous driving – two industries with massive growth potential.
Apple stock isn’t without risk. The industries it operates in are highly competitive. There’s no guarantee the iPhone will be popular forever. However, overall, I think the long-term investment case is attractive. I see the stock’s price-to-earnings (P/E) ratio of 27 as very reasonable, given the company’s track record.
The next FAANG stock I’d buy is Alphabet (NASDAQ: GOOG). It’s the owner of Google and YouTube and the largest digital advertising company in the world.
The reason I’m bullish here is that the digital advertising market looks set for huge growth in the years ahead. In 2019, the online advertising market was worth around $300bn. By 2025 however, it’s expected to be worth nearly $1trn. This market growth should provide powerful tailwinds for Alphabet.
One risk I’m keeping a close eye on here is regulatory intervention. Currently, major global regulators have Big Tech firms in their sights. This could impact the investment case.
All things considered however, I think the risk/reward proposition is attractive. The stock’s P/E ratio of 29 isn’t excessive, to my mind.
Finally, the other FAANG stock I’d buy is Amazon (NASDAQ: AMZN). I like Amazon for two reasons. Firstly, it’s a leader in online shopping. This industry is set for huge growth over the next decade.
Secondly, it’s a leader in cloud computing. This industry is also set for enormous growth over the next decade. According to MarketsandMarkets, the global cloud computing market size will grow to $830bn+ by 2025, up from $370bn last year.
Now, this stock is expensive. Currently, its P/E ratio is about 64. That adds risk. If growth slows, the stock could fall heavily.
But given Amazon’s dominance in two high-growth industries, I don’t think I can afford to ignore the stock.
What about the other two FAANGs?
As for Facebook and Netflix, I have some reservations about these FAANG stocks.
Facebook is growing rapidly and looks set to profit from the digital advertising boom. However, there’s a high level of distrust towards the company. So, I don’t see it as a buy.
Netflix does have an amazing product. Yet I think it’s likely to face intense competition from Amazon and Disney in the years ahead. And the costs of producing top shows is very high. So, it’s also isn’t a buy for me.
Edward Sheldon owns shares in Apple, Amazon and Alphabet. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, Apple, Facebook, Netflix, and Walt Disney and recommends the following options: long January 2022 $1920 calls on Amazon, short March 2023 $130 calls on Apple, long March 2023 $120 calls on Apple, and short January 2022 $1940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.