Average hedge fund managers tend to underperform S&P 500, which means their clients would be better off buying an S&P 500 index fund. However, some fund managers are bucking this trend, and investors may want to look to them for inspiration.
For example, Larry Robbins of Glenview Capital Management and Lewis Sanders of Sanders Capital have significantly outperformed the S&P 500 over the past three years, and both investors have bought FAANG stocks throughout the bear market that began in 2022.
Since the beginning of last year, Robbins has significantly increased his stake Amazon (AMZN 2.99%), and now makes up more than 3% of his portfolio. Meanwhile, Sanders has aggressively increased his bid Alphabet (GOOG 0.97%) (GOOGL 1.09%)and it now makes up more than 8% of his portfolio.
Is it time to buy these two FAANG stocks?
1. Amazon
Last year was disastrous for Amazon shareholders. The stock fell 49%, its worst performance since the dot-com crash in 2000, as the economy led to disappointing financial results.
The company posted losses on a generally accepted accounting principles (GAAP) basis in the first and second quarters, and while it managed to return to profitability in the third quarter, operating income fell 49% year-over-year to $2.5 billion. But investors need to look beyond short-term economic headwinds.
Despite weak financial results, Amazon ranked as the second most valuable brand in the world in 2022, behind Apple — according to Brand Finance, a distinction that reflects its strong competitiveness in three growth markets.
Most consumers associate Amazon with e-commerce. The company operates the most visited online marketplace in the world and accounts for nearly 40% of digital retail sales in the US, but Amazon offers more exciting growth opportunities in the higher-margin cloud computing and digital advertising markets.
Research company Gartner has recognized Amazon Web Services (AWS) as the leader in Cloud Infrastructure and Platform Services (CIPS) for 12 consecutive years, and AWS had a 34% market share in CIPS in the third quarter, up from Microsoft Azure and Google Cloud together.
That puts the company in a good position, with the cloud computing market expected to grow nearly 16% annually to reach $1.6 trillion by 2030, according to consulting firm Grand View Research. Even better, AWS posted an operating margin of 26% last quarter, while Amazon’s retail business rarely reaches 5%. That means the parent company should become increasingly profitable as AWS accounts for a larger portion of its top line.
Amazon is also the fourth largest digital advertiser in the world, ranking among market leaders Google and Meta platforms. This trend is good for the company. Digital advertising is also much more profitable than retail, with global digital ad spending expected to grow 9% annually to reach $1.3 trillion by 2030, according to Precedence Research.
The stock currently trades for 1.8 times, a bargain compared to its five-year average of 3.7. At this price, Amazon stock is a screaming buy.
2. Alphabet
According to Brand Finance, Alphabet’s Google ranked as the third most valuable brand in the world in 2022, reflecting the huge popularity of its platforms such as Google Search and YouTube. The former has more than 92% market share among search engines, an achievement that demonstrates its expertise in artificial intelligence, and YouTube is the top streaming service in terms of watch time.
Google combined this popularity (and the consumer data generated from these platforms) with a robust suite of ad technology solutions. Its portfolio includes buy-side tools that help brands deliver relevant advertising to consumers, as well as sell-side tools that help publishers monetize their ad inventory. Thanks to this vast ecosystem, Google is the largest advertiser on the planet, capturing more than 28% of all digital advertising dollars.
Google is also gaining ground in cloud computing, fueled by investments in product development and go-to-market opportunities. Google Cloud Platform gained 11% market share in CIPS in the third quarter of 2022, compared to 7% two years earlier. As a caveat, Google still trails Amazon and Microsoft by a wide margin, but the company is firmly in third place and its product offering is improving faster than the market leaders, according to Gartner.
Financially, Alphabet struggled amid a tough economy as many brands slashed their ad budgets to compensate for declining consumer demand. The company reported revenue growth of just 6% in the third quarter, and profits fell 24%. But these headwinds are short-lived, and Alphabet remains in a strong position in digital advertising and cloud computing.
The stock currently trades for 4.2 times, a discount to its five-year average of 6.4. At this price, investors should consider buying some of these FAANG stocks.
Susan Frey, CEO of Alphabet, is a member of The Motley Fool’s Board of Directors. John Mackie, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool’s Board of Directors. Randi Zuckerberg, former CMO and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s Board of Directors. Trevor Jennewin holds positions at Amazon.com. The Motley Fool takes positions in and recommends Alphabet, Amazon.com, Apple, Meta Platforms and Microsoft. The Motley Fool advises Gartner and recommends the following options: long March 2023 $120 Apple calls and short March 2023 $130 Apple calls. The Motley Fool has a disclosure policy.
