The Next FAANG Stocks: 3 Stocks That Could Become Millionaire Makers



The post The Next FAANG Stocks: 3 Stocks That Could Become Millionaire Makers appeared first on Millennial Money.

You’ve likely heard of “FAANG” stocks. The acronym includes Facebook, Apple, Amazon, Netflix, and Google (trading under Alphabet). 

The stocks are all leaders across important technologies, but investors may not fully grasp just how important this group is. Take a look at the table below, which summarizes the largest companies in the world across the past two decades. 

2001 2011 2021
General Electric Exxon Mobil Apple
Cisco Systems PetroChina Microsoft
Exxon Mobil Apple Amazon
Pfizer ICBC Alphabet
Microsoft Petrobras Facebook
Source: Financial Times. All company rankings are at the close of the first quarter of their respective years.

Notice how shocking this is? In 2001 and 2011 there were three tech companies that made the list of world’s largest companies (Cisco, Microsoft, and Apple). 

Today, the five largest companies are all technology giants. Here’s another surprising stat: the combined value of the five largest companies in 2011 was just under $1.6 trillion. 

Today Apple ($2.2 trillion), Microsoft ($2 trillion), and Amazon ($1.7 trillion) are each worth more than that on their own

Clearly, FAANG stocks are driving the market at unprecedented rates. The success of the group brings up two important points:

  1. Leading important technology industries is extremely valuable and can lead to incredible growth rates even while companies reach historic sizes. For example, while Apple is worth more than $2 trillion today, it grew sales by 54% last quarter. 
  2. While these companies have thrived across the past decade, technology is constantly changing. Beyond this group of companies, the rise of AI could soon make both NVIDIA and Taiwan Semiconductor trillion-dollar companies as well. 

Below, you’ll find three stocks that could follow in the footsteps of FAANG stocks and become leaders in massive industries across the next decade. 

These could be worthy additions to your portfolio if you’ve become overly concentrated in FAANG stocks that are now the market’s largest companies. In addition, after this list of three stocks that could become “the next FAANG,” we’ll discuss the biggest threat targeting FAANG stocks today: regulation. 

While big technology might have been a massive winner for portfolios across the past decade, the influence of these companies is becoming a major headache for Washington.

If you own FAANG stocks, you won’t want to overlook the impact of regulation as it could become the storyline impacting these companies’ share prices across the next decade!

For each “Next FAANG” stock below, I’ll list how the biggest threat to today’s FAANG stocks—increasing regulation—could actually drive their business forward.

This means that by adding these stocks to your portfolio, you could potentially increase your upside and see a benefit from the greatest risk facing most technology investors’ portfolios today! 

Next FAANG Stock #1: MercadoLibre

  • MercadoLibre (NASDAQ:MELI)
  • Price: $1541.72 (as of close Jun 25, 2021)
  • Market Cap: 76,858,317,248

Industry: Ecommerce in Latin America

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Shares of ecommerce provider MercadoLibre have been on fire, jumping 1,000% in the last five years.

Although MercadoLibre operates in Latin America, and any new U.S. laws might not impact competition in their home markets, MercadoLibre would certainly benefit from Amazon scaling back its plans for world domination to appease regulators. 

Increasingly, the investment thesis around MercadoLibre is not in its ecommerce business but rather in its MercadoPago money transfer service.

Initially, the digital payments solution was conceived to foster ecommerce transactions on its platform but has expanded to an off-platform payment system and even includes extended banking services like asset management and its MercadoCredito line of credit. 

Amazon continues to expand its Latin American and South American presence with a focus on Brazil and Mexico. However, MercadoLibre still holds the lead in the region on account of MercadoPago and assorted banking services, which has the effect of locking users into its ecosystem.

In the first quarter, total payment volumes and off-platform services increased 129% and 136% (constant currency) respectively, while gross merchandise volume for online sales increased 114%. 

Amazon will likely need approval from American regulators to provide a comprehensive banking solution to compete with MercadoPago. Banking has been a difficult industry for Big Tech to disrupt, with horror stories like Facebook’s attempt to create its own currency dubbed Libra.

Regulators opposed the initial concept and early partners like Visa and Mastercard quickly exited out of the partnership before Facebook decided to rename the toxic idea (now Diem) and scale back its plans.

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Next FAANG Stock #2: Okta

  • Okta (NASDAQ:OKTA)
  • Price: $246.13 (as of close Jun 25, 2021)
  • Market Cap: 37,653,008,257

Industry: Cloud-based security software

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While big tech might be getting more scrutiny in Washington, one industry faces little threat of regulation: cybersecurity.

Simply put, better security at companies across America is in the interest of Uncle Sam, with vital industries like energy and utilities having been the subject of high-profile cyber attacks in recent months. 

Okta stock has gained 1,300% since its $17 2017 IPO on account of its innovative solutions in the identity and access management market (IAM). 

Simply put, Okta’s primary business is providing companies the tools they need for identity, ensuring their workforce has proper access to the business applications they need to perform their jobs while preventing bad actors from breaching security protocols.

Unsurprisingly, Big Tech provides competing services. Microsoft and Alphabet have two-factor authentication (2FA) apps: Microsoft Authenticator and Google Authenticator.

However, Okta has been able to outperform both in this space due to its comprehensive solutions-based approach to IAM.  

Shares of Okta are down slightly this year, underperforming the broader markets due to the belief that the company is a stay-at-home stock and demand for services will wane as America returns to the office.

While demand was boosted during the pandemic, the company is well-situated for future growth. 

For one thing, it’s likely many employers will continue to offer at least a hybrid approach as employees are increasingly demanding more flexibility.

As previously referenced, identity and access management will continue to be top-of-mind for companies as high-profile cyber attacks like the Colonial Pipeline and JBS ransomware attacks continue. 

Next is the nascent opportunity for Okta in its customer identity and access management (CIAM) businesses. It’s important to ensure customers have a secured but seamless authentication experience to increase engagement, which will lead to repeat purchases. 

Okta jumped headfirst into this opportunity by acquiring CIAM specialist Auth0 in an all-stock deal. The total addressable market (TAM) for Okta prior to the acquisition was approximately $50 billion, but buying Auth0 gives Okta a head start in addressing a much larger TAM of $80 billion. 

For long-term investors who understand that cybersecurity will be an important part of the future, Okta looks like a great bet regardless of whether or not Big Tech will be regulated.

Next FAANG Stock #3: The Trade Desk 

  • The Trade Desk (NASDAQ:TTD)
  • Price: $76.02 (as of close Jun 25, 2021)
  • Market Cap: 36,168,235,332

Industry: Advertising technology growing rapidly with the growth of streaming

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Shares of buy-side digital advertising technology company The Trade Desk cratered on first-quarter earnings but are now beginning to recover. Still, shares are nearly 16% lower than they were in February and that’s an opportunity for long-term investors. 

The U.S. digital advertising market has become a triopoly with Facebook, Google, and increasingly, Amazon being the dominant players. According to data from research company eMarketer, the three giants command 25.2%, 28.9%, and 10% of this nearly $140 billion market. 

This means two-thirds of revenues go to these three walled-garden advertisers that handle all facets of the advertising process, meaning the data isn’t shared with the advertiser.

This black box approach has the potential of leading to ineffective spend and has received pushback from newer advertisers. In the event Washington begins to look at market dominance for Big Tech, this is one area that seems particularly sensitive for regulation.

But even if Washington doesn’t weigh in, one-third of a $140 billion market is still significant. Also, this is a key growth market as digital steals marketing spend away from television and print media.

At the same time, marketing is experiencing a long shift from person-to-person negotiation to programmatic advertising. As the largest independent digital programmatic advertiser, The Trade Desk is well situated for growth.  

The Trade Desk certainly understands the immense market power from Big Tech and has been stung by their market dominance.

Last year, its stock rallied 208% upon the belief that its Unified ID 2.0 (UID 2.0) opt-in email tracking solution would replace third party cookies after Alphabet and Apple agreed to eliminate the tracking method. 

Shares tanked amid reports that Alphabet and Apple are taking action to prevent UID 2.0’s email-based identifier from capturing data.

While both cite privacy to explain this decision, cynics pointed out the move had the additional benefit of boosting their services over other digital advertisers. 

Apple has recently started to ramp up its advertising efforts and Google’s entire business model is based on tracking and data collection, so concerns about privacy seem self-serving. 

Although down from all-time highs, The Trade Desk shares have recovered as UID 2.0 fears are not as bad as initially thought and don’t apply to the high-growth advertising verticals like connected TV that led The Trade Desk’s growth last quarter.

The Trade Desk is also moving into new areas like its recent deal with Walmart to provide it with a demand side platform. Whether or not increased technology regulation hits leading FAANG stocks, The Trade Desk looks destined for growth.

Estimates put the company’s 2025 sales at north of $3 billion (from $836 million in 2020), and with digital advertising continuing to grow, it’s easy to see how the company could reach beyond $10 billion in sales before the end of the decade. 

Regulatory Threats to FAANG Stocks 

Big Tech currently appears invincible and for good reason: Apple dominates the smartphone and mobile operating system category from a profit perspective, and Alphabet’s Android takes the remainder in an ecosystem duopoly.

In digital advertising, Alphabet and Facebook claim nearly half of total revenue with the other large-scale player being Amazon. 

Microsoft commands both an operating system lead in computers (facing only competition from Apple) and a strong position in fast-growth cloud computing, with the only other serious player being market leader Amazon. 

By now you’ve likely noticed a lot of overlap; that’s not by happenstance. Let’s face it, you don’t grow to a trillion-dollar market cap without dominating multiple categories.

For consumers, it can appear seamless but there are multiple technology businesses bundled in the experience.

And therein lies the regulatory risk: after decades of both parties applying light-touch regulation to the technology industry, Washington is taking notice of these bundled services and doesn’t like what they see. 

Legal and regulatory risk is significantly rising.

This month a bipartisan group of legislatures debuted six (yes, six!) bills to curb the power of Big Tech and appointed noted Big Tech critic Lina Khan—or as The Wall Street Journal’s MarketWatch called her, “Big Tech’s biggest nightmare”—to the top role at the Federal Trade Commission. 

So far, regulation is focusing on two issues. The first is the focus on anticompetitive acts in their digital communities and marketplaces (aka platforms).

A recent bill entitled the American Choice and Innovation Online Act establishes rules that will make it difficult for Apple and Google to fix prices for third-party services on their smartphone ecosystems. 

The act would prevent companies like Amazon from boosting their internal brands (Goodthreads, Amazon Essentials, 365) over competitors on their ecommerce marketplaces.

Another bill would make it illegal for Alphabet to own YouTube as it could disadvantage search results from other video streaming services.

The second issue lawmakers want to curb is Big Tech’s use of acquisitions to eliminate competitors and build collective monopoly power.

An April Washington Post article revealed how prevalent this practice is among Big Tech companies, noting each of the “Big 4” (Facebook, Alphabet, Amazon, and Apple) had each acquired more than 100 companies throughout their history, with Google taking the lead with 268 acquisitions.

Investors are rightly reticent about more regulation and if you have money in the stock market, you likely have exposure to Big Tech. In fact, the top five companies comprise more than 20% of the entire S&P 500, a market capitalization weighted index. 

However, keep in mind that while regulation could be a negative for FAANG stocks moving forward, it can be a positive for smaller stocks as well. 

As mentioned earlier, increased regulation could help many companies a fraction of the size of FAANG stocks. In addition, limiting the ability of FAANG stocks to purchase so many smaller companies could be a boon for investors looking for small stocks in huge growth markets. 

As an example, just think about the profits that likely never would have been realized if Blockbuster had purchased Netflix in its infancy and rather than going “all in” on streaming, killed the project for anti-competitive reasons!

Pick Like A Pro

Where to invest $500 right now

Are you ready for “maximum upside?”

Motley Fool Rule Breakers is led by legendary investor David Gardner and pinpointed Tesla at $6.29, Salesforce at $6.89, and Shopify at $21.02. (It trades for more than $1,000 per share today!)

Here’s why you’ll want to get the full details on Rule Breakers today. The service just announced its top 10 “best buys now” across the entire stock market. Whether you’re starting with $100, $500, or more, you’ll want to get the full details!

Click here to learn more

The post The Next FAANG Stocks: 3 Stocks That Could Become Millionaire Makers appeared first on Millennial Money.



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