Netflix Stock – The One FAANG Stock That’s Trading Up in 2021, and It’s Rated Strong Buy
Over the last few years, the FAANG stocks have risen to prominence. The acronym FAANG stands for Facebook, Inc. (FB), Amazon.com, Inc. (AMZN), Apple Inc. (AAPL), Netflix, Inc. (NFLX), and Alphabet Inc’s Google (GOOGL). These companies have ascended to unprecedented price heights on the back of their sound business models, strong earnings, and dominance in their respective markets. However, the elite group has been shaken up somewhat over the past year, facing multiple antitrust allegations around the globe.
Despite these developments, search engine giant GOOGL has been reporting impressive operating results and share price performance. The stock has gained 67.8% over the past year, outperforming the tech-heavy Nasdaq’s 58.6% returns. Additionally, GOOGL has returned 16.4% so far this year, compared to the Nasdaq’s and other FAANG components’ negative returns.
Let me explain why GOOGL could keep soaring in the coming months:
Hefty Product Pipeline
GOOGL operates primarily through three segments – Google Services, Google Cloud, and Other Bets segments. It offers products that include Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure.
GOOGL is considered a near-monopoly in online search and, consequently, the company generates major revenue from ad services. In fact, Google currently accounts for more than 90% of global internet search activity. The company is regarded as a “Gatekeeper” of the internet due to its dominant market share, which bolstered by being the default search provider for many smartphone and desktop browsers.
Shifting focus to GOOGL’s other operations, YouTube is now one of the three-most visited social sites worldwide, while cloud infrastructure service provider Google Cloud is the company’s fastest-growing segment. GOOGL has already partnered with major tech leaders to consolidate its stake in the 5G technology, and Google X’s diverse bets that range from Waymo (driverless cars) to Verily and Calico (life sciences) to Deepmind (Artificial intelligence systems) also present immense growth potential for the company.
Solid Financial Performance
GOOGL’s revenue and EPS grew at a CAGR of 18.1% and 48.2%, respectively, over the past three years. Also, the CAGR of the company’s free cash flow has been 14.9%. GOOGL’s revenue in the fourth quarter (ended December 31, 2020) was $56.9 billion, a 23% increase versus the prior year. Google advertising contributed more than 80% to the company’s top-line, while its Cloud segment generated $3.8 million in revenue during the quarter. However, only the Google Services segment generated positive operating income. GOOGL reported EPS of $22.54, rising 46.8% versus the year-ago value of $15.35.
Favorable Analyst Sentiment
Analysts expect GOOGL’s revenue to increase 24.9% in the current quarter (ending March 31, 2021), 23.9% in the current year and 16.7% next year. The company’s EPS is expected to grow 60.6% in the current quarter, 18.7% in the current year and 16.5% next year. Also, its EPS is expected to grow at an average rate of 17% per annum over the next five years.
In addition, of the 41 Wall Street analysts that rated the stock, 36 have given GOOGL either a Strong Buy or a Buy rating.
POWR Ratings Show Odds are in Favor
GOOGL has an overall rating of A, which equates to Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system evaluates each stock based on l eight different categories. Among these categories, GOOGL has a Sentiment Grade of A, reflecting greater analyst confidence in the company’s ability to surpass consensus estimates.
GOOGL has a Momentum Grade of B, which is in sync with its strong price performance. Moreover, the stock has a Quality Grade of B, which is consistent with its sound fundamentals and robust financials. Of 68 stocks in the Internet industry, GOOGL is ranked #1.
There is no doubt that FAANG stocks are facing several legal and regulatory challenges, especially in the EU and Australia. However, GOOGL has already tackled the Australian law that forces companies to pay news publishers for the right to link to their content by signing a multi-year partnership deal with News Corporation (NWSA) to receive content for Google News showcase. Furthermore, GOOGL is a company with rock-solid financials and the wherewithal to fight potential antitrust troubles.
Investors must also acknowledge that as the global economy recovers this year, GOOGL’s search platform is well-poised to benefit from the increased advertising spending. The company is rapidly expanding its data centers to increase its presence in the cloud space to help companies leverage edge computing and 5G. Its strong focus on AI and the home automation space should further aid growth over the long term. Hence, we believe GOOGL will outperform its peers as well as the broader market in 2021.
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GOOGL shares were trading at $2,046.07 per share on Wednesday afternoon, up $5.71 (+0.28%). Year-to-date, GOOGL has gained 16.74%, versus a 4.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More…