When volatility and uncertainty pick up on Wall Street, investors of all walks tend to turn their attention to profitable, time-tested, industry-leading businesses. For much of the past 10 years, it’s the FAANG stocks that have been investors’ safety net.

When I say “FAANG stocks,” I’m referring to:

• Facebook, which is now a subsidiary of Meta Platforms (META -4.17%)
• Apple (AAPL -1.35%)
• Amazon (AMZN -5.58%)
• Netflix (NFLX -0.60%)
• Google, now a subsidiary of Alphabet (GOOGL -9.51%) (GOOG -9.60%)

Aside from handily outperforming the benchmark S&P 500 over the past decade, the FAANG stocks bring well-defined competitive advantages to the table.

• Meta Platforms owns some of the top social media “real estate” on the planet. Collectively, Facebook, WhatsApp, Instagram, and Facebook Messenger encouraged nearly 3.9 billion people to visit a Meta-owned asset each month during the June-ended quarter.
• Apple is the largest publicly traded company by market cap in the U.S. and the leading provider of smartphones domestically. It’s also the king of capital-return programs, with Apple repurchasing around $600 billion worth of its common stock since the start of 2013.
• Amazon is the world’s leading online retail marketplace and is responsible for bringing in roughly $0.40 of every $1 spent in online retail sales in the United States. Further, Amazon Web Services (AWS) is the leading cloud infrastructure service provider by total spending.
• Netflix is the world’s leading streaming content provider by market share. Among streaming services, none comes close to the library of original content Netflix can offer.
• Alphabet’s Google is a virtual monopoly in internet search. It held a nearly 92% share of worldwide internet search share, as of September 2023. Alphabet is also the owner of streaming video platform YouTube, the second-most visited site behind Facebook.

But despite their dominance, Wall Street’s outlook for the five FAANG stocks differs significantly. According to the high-water price targets from a pair of Wall Street analysts, two FAANG stocks offer as much as 79% upside.

Alphabet: Implied upside of 54%

The first FAANG stock with jaw-dropping upside, at least according to one Wall Street analyst, is Alphabet. Analyst Ross Sandler at Barclays maintained a buy rating on shares of the company in September, with an aggressive price target of $200. When accounting for Alphabet’s after-hours move at the time of this writing on Oct. 24, 2023, Sandler’s price target would result in a 54% gain.

Arguably the biggest headwind that could keep Alphabet from reaching the highest-issued price target on Wall Street is the health of the U.S. economy. With a number of economic data points and predictive tools suggesting a recession is on the horizon, ad-driven businesses, like Alphabet, could struggle. Historically, advertisers are quick to reduce their spending at the first sign of economic weakness.

But the counter to this argument is that the U.S. economy spends a disproportionate amount of time expanding. Of the dozen U.S. recessions following World War II, only three have lasted at least 12 months. By comparison, almost every expansion has endured for multiple years, with one continuing for a decade. The advertising industry grows in lockstep with the U.S. economy over time.

However, Alphabet isn’t just any ad-driven business. Google hasn’t held less than a 90% share of worldwide internet search since the first quarter of 2015. Having a veritable monopoly in internet search affords the company exceptional ad-pricing power in most economic climates.

There’s also plenty of excitement for Alphabet beyond its foundational search engine. Google Cloud is the world’s No. 3 cloud infrastructure service provider (by market share), and it’s generated three consecutive quarterly operating profits following years of losses. Despite analysts being collectively disappointed by Google Cloud’s 22.5% year-over-year sales growth in the September-ended quarter, it’s important to recognize that enterprise cloud spending is still in its relatively early stages. This is a high-margin segment that’s only going to get stronger from a cash flow perspective over time.

Don’t forget about YouTube, either. In a span of roughly two years, daily views of YouTube Shorts (short-form videos often less than 60 seconds in length) catapulted from about 6.5 billion to north of 50 billion. These bite-sized videos are turning into a serious ad-growth opportunity for YouTube and parent Alphabet.

Lastly, Alphabet remains inexpensive, given its sustained moat in internet search and its rapidly growing operating cash flow. Shares are currently valued at roughly 19 times forward-year earnings and below 14 times consensus cash flow in 2024. For context, Alphabet has averaged a forward price-to-earnings (P/E) ratio of 25 over the past five years, along with a cash flow multiple of 18.

Suffice it to say, a $200 price target isn’t out of the question at some point within the next year or three.

Image source: Amazon.

Amazon: Implied upside of 79%

However, the FAANG stock that offers the most blistering upside, based on the price target of one Wall Street analyst, is e-commerce kingpin Amazon. In August, analyst Alex Haissl of Redburn Partners maintained his firm’s buy rating on Amazon but upped his price target from $220 to $230. If Amazon were to reach this lofty price target, its shares would increase 79% from where they closed on Oct. 24.

Similar to Alphabet, the biggest knock against Amazon will be the health of the U.S. economy. People are most familiar with Amazon for its leading online marketplace. If a recession were to take shape, the expectation would be for online retail sales to decline.

The thing is, Amazon’s top segment for revenue isn’t all that important for cash-flow generation. While e-commerce tends to be the lure that attracts a lot of consumers in the first place, it’s the company’s ancillary operations that drive virtually all of its cash flow and operating income. In short, a weaker retail spending environment may not be a big deal for Amazon.

If Amazon stock were to make a run at Haissl’s high-water price target, it would almost certainly be because of strength from AWS. As of the June-ended quarter, tech analysis firm Canalys estimated that AWS accounted for 30% of global cloud infrastructure service spending. Even though AWS generates just a sixth of Amazon’s net sales, it regularly contributes 50% to 100% of the company’s operating income.

Subscription services is another key high-margin segment for Amazon. The lure of its online marketplace, growing content library, and exclusive rights to Thursday Night Football helped push its global Prime subscriber count past 200 million in April 2021. As one of these 200 million-plus subscribers, I can somewhat confidently say that Amazon has exceptional pricing power with Prime.

Advertising services is the third and final ancillary segment that’s of importance. Amazon is one of the most-visited sites in the world, which means it offers prime “real estate” to advertisers. Excluding currency movements, Amazon has delivered eight consecutive quarters of at least 21% year-over-year sales growth from its advertising segment.

Although Amazon isn’t cheap by a traditional measuring stick (i.e., using the P/E ratio), it’s historically inexpensive when analyzed relative to its future cash flow. The latter is a far better measure for Amazon than the traditional P/E ratio, given that Amazon reinvests most of its cash flow back into its faster-growing operations. Whereas Amazon was consistently valued at 23 to 37 times its year-end cash flow throughout the 2010s, it can be purchased by opportunistic investors right now for less than 12 times Wall Street’s consensus cash-flow estimate for 2024.

Similar to Sandler’s price target on Alphabet stock, I believe Haissl’s share price forecast for Amazon can come to fruition within the next few years.