I think everyone here has heard of FAANG stocks, as these big names in tech have delivered impressive returns over the past decade. While some of the companies changed names during this period, the letters stand for Facebook/Meta Platforms (META), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google – or as it is now called, Alphabet (GOOG, NASDAQ: GOOGL).

All investors in these companies since 2012 have been very well rewarded, with each company comfortably outperforming the benchmark S&P 500 index.

But investing is a forward-looking game, so which of these companies is expected to be the most successful in the coming decade? While you could make a compelling case for any, my pick is Alphabet, and I’ll tell you why.

Company overview

Alphabet is divided into two main segments related to Google: Google Services and Google Cloud, with another segment for other bets.

Products and platforms at the core of Google Services include Ads, Android, Chrome, Hardware, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube. These are all services we come into contact with every day; I currently use Google Chrome and Google Search to do a lot of research for this article. Hardware products also offered by Google include Pixel smartphones, Fitbit, Chromecast, and Google Nest Cams and Doorbell.

Google Cloud is the company’s cloud platform and a challenger to Amazon’s AWS and Microsoft’s Azure. It also offers Google Workspace, which generates revenue from cloud-based collaboration tools for businesses such as Gmail, Docs, Drive, Calendar and Meet.

Alphabet’s final offering is the Other Bets section, which is essentially venture capital. It invests in emerging businesses at various stages of development with the goal of them becoming successful and successful businesses over the medium to long term. Probably the best known of these Other Bets is Waymo, a self-driving startup.

Alphabet has a strong business model in many of these different areas. In the search engine market, Google is the undisputed leader and has been for some time, with a global market share of over 85% in January 2022 according to Statista. When it comes to search, Google has clear competitive advantages through its brand name as well as a technological advantage; its machine learning has outperformed all other “competitors” over the past decade.

The company also acquired YouTube in 2006 for a whopping $1.65 billion…which, given YouTube’s current performance, looks like an absolute steal! In fact, YouTube grew its revenue to an impressive ~$29 billion in 2021, nearly surpassing pure-play streaming leader and fellow FAANG member Netflix.

Let’s not forget Google Cloud; it may still be behind leaders Amazon and Microsoft, but has the potential to be a major profit driver for Google in the years to come, as we’ve seen before with AWS and Amazon (& as I pointed out in a recent article). Google is still in the investment phase of its cloud infrastructure, and I think its future looks bright here as well.

There’s no denying that Alphabet has a bunch of brilliant companies, many of which dominate their core industries…but who cares? Exactly the same could be said for the rest of FAANG stocks. So, assuming that all of these companies have fantastic business models, what separates Google from the rest of the pack?

financial courage

A key driver of future growth for these FAANG stocks is their ability to diversify, try new things, and explore exciting, innovative, and potentially game-changing technologies to create new revenue streams – but to do that, businesses must be both financially secure and have a war chest to spend. So how do they stack up? Alphabet is in a league of its own, with nearly double the net cash of its nearest FAANG competitor, Apple.

This, combined with Alphabet’s constant attempts to find and develop the next “big thing” to drive their business forward, should be a winning combination for shareholders. The company even mentions its approach to “Moonshots” in its annual report:

Many companies feel comfortable doing what they have always done, only making incremental changes. This incrementalism leads to a loss of relevance over time, especially in technology, where change tends to be revolutionary and not evolutionary. People thought we were crazy when we acquired YouTube and Android and when we launched Chrome, but those efforts turned into major platforms for digital video and mobile devices and a popular, more secure browser. We continue to look to the future and invest for the long term in each of our segments. As we said in the original Founders Letter, we will not back down from the high-risk, high-reward projects we believe in, because they are key to our long-term success.

So not only does Google have the culture to pull off these Moonshot attempts, it also has the cash in hand.

What about the business model itself? Is it designed to continue to generate shareholder value? Personally, I look for strong margin profiles in all companies I invest in, and Google has consistently generated the second highest EBIT margins of any FAANG stock – second only to Meta, of which I’m not the biggest fan. for the reasons I mention in this previous article.

Combine those high margins with an already insane cash balance, and you have a business that will not only continue to print money, but is also in a ridiculously strong position to take risk and reinvest in any growth opportunities. such as Google Cloud. If we also look at free cash flow in absolute terms, Google is also the second-best FAANG – this time after Apple.

It’s clear that Google has one of the best financial profiles of all FAANG stocks, but what does the future hold for this tech giant?

Growth opportunities

While the past and present have made Alphabet the company it is today and helped build a pretty impenetrable divide, the same can be said for many other FAANG actions. The question now is whether or not any of these FAANG companies can continue their impressive growth story, as that is what will be needed to satisfy shareholders.

I believe Alphabet has a number of tailwinds at its back for the decade ahead; secular growth of digital advertising (Google Search), secular growth of streaming (YouTube); secular growth of cloud computing (Google Cloud), and many other growth stories in which Alphabet is involved. Still, a number of investors will make the same case for all other FAANG stocks, so let’s take a look at what analysts think will happen over the next 5 years, courtesy of TIKR.

In terms of revenue growth, Alphabet comes out in its apparent favorite position – second best, this time behind another different competitor to FAANG, Amazon. Although the difference between Alphabet, Amazon and Meta is small in terms of expected CAGR, I think it demonstrates that the growth is definitely still there for these companies and they have an opportunity ahead. Apple, one of the darlings of the stock market, is certainly not expected to grow at a similar rate to these companies – so maybe we will start to see a change at the top of the FAANG?

Evaluation

Let’s get to the valuation, because at the end of the day, these are all different companies with different trajectories, and therefore they should all have different valuations. I’ll use a slightly simplified version of my standard valuation model to get a rough idea of ​​these companies’ individual valuations relative to their potential in 2026.

In case it’s hard to see from the model, here are the stock price CAGR results through 2026:

• Alphabet: 18%
• Amazon: 16%
• Apple: 3%
• Meta: 23%
• Netflix: 25%

In terms of EV/EBIT multiples, I think 12x is an appropriate multiple for a stable business, and 16x is an appropriate multiple for a stable but growing business. Amazon gets a higher multiple due to the potential for EBIT margin expansion, Apple gets a lower multiple due to its lower growth rates, and Meta gets a lower multiple due to the risk associated with both its image as a company and the attempt to change the metaverse.

According to my model, Meta and Netflix offer the best return, but why? Because I feel like these companies are currently most at risk of not hitting their growth rate. Meta faces a real PR challenge, and moving to Metaverse seems like a long shot that MUST work for the company or it could face a tough future. Netflix is ​​also risky right now, as it has hemorrhaged subscribers and investors are waiting for a turnaround. I do not believe that risks of these levels exist for Alphabet, Amazon or Apple. This explains why Netflix and Meta are currently trading at valuations that appear to be well below their fair value – the market is smart and prices are in this risk.

What is the conclusion?

I took a look at Alphabet compared to other FAANG stocks, but how can I conclude which is the best of the bunch? Well, I’ll try to do it in a methodical way – ranking each business in each category out of 5 and then seeing who gets the highest score.

While all FAANG stocks excel in one or two particular areas, Alphabet is the only one to have strengths in all areas. I don’t pretend to claim that this simplistic ranking system provides an accurate prediction of the success of these FAANG stocks – I personally prefer Amazon as an investment to Apple or Meta. But what it shows is that Alphabet seems like a much more comprehensive company.

All of the companies above are fantastic on their own. Still, I believe Alphabet is truly in a class of its own and will prove to be the best FAANG title over the next decade.