Here Are My Top Picks for January 2022

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For the past 12 years, growth stocks have been the driving force in the U.S. equity market. Buoyed by abundant capital thanks to ultra-low interest rates, many unprofitable and speculative tech stocks also made a killing in this time frame.

However, lately, investors have been increasingly opting for fundamentally strong and stable stocks in the face of rapidly rising inflation. This flight to safety can prove highly beneficial for Meta Platforms (NASDAQ:FB) and Amazon (NASDAQ:AMZN) — two tech giants which enjoy solid economic moats and robust network effects. Let’s dive in and see what makes these stocks tick in 2022.

Image source: Getty Images.

1. Meta Platforms

The last few years were not kind to the social networking giant Meta Platforms, formerly known as Facebook. The company has been mired in several controversies such as the Cambridge Analytica scandal, an alleged role in spreading hate speech and false news, allegations of misusing privacy data, and worries that Meta monopolizes the digital landscape. Yet, the stock has managed to make a decent gain of over 23% in the past year.

Things, however, may improve significantly in 2022, especially now that Meta is focused on rebranding itself as a frontrunner in the $30 trillion metaverse market (estimated market value at end of the next decade according to Matthew Ball, Epyllion’s CEO).

In the past few years, the company has been strengthening its portfolio for this opportunity with a spree of acquisitions such as leading immersive virtual reality hardware player Oculus VR, game studio BigBox VR, and maker of free-to-play game creation and sharing tool Unit 2 games. Coupled with Meta’s prowess in social networking, a huge and engaged customer base, and increasing capital expenditure investments (in data centers, servers, network infrastructure, artificial intelligence, and machine learning capabilities), the company is well poised to be a winning play in 2022.

Meta is already a very profitable, cash-rich business, thanks to the strength of its advertising revenues from its Facebook and Instagram apps. In the third quarter ending Sep. 30, 2021, the company’s revenues were up 35% year over year to $29 billion, while net income rose by 17% year over year to $9.2 billion. The company has ended the third quarter with $58.1 billion in cash and marketable securities.

Analysts are now guiding for Meta’s earnings per share to grow annually at 21.35% in the next five years. Despite these solid long-term projections, the company is trading at only 23.6 times forward earnings, at multiples far lower than those of peers such as Snap and Twitter.

Against the backdrop of a robust advertising business, healthy financials, and a reasonable valuation, Meta seems to be an attractive pick for 2022.

2. Amazon

Amazon’s shares have mostly struggled in the second half of 2021. While the COVID-19 pandemic helped drive up the company’s top line in 2020, it presented the challenge of difficult previous-year comparisons for 2021. This, coupled with global raw material supply chain constraints (labor, raw material, and shipping costs) and slowing revenue numbers, has led to the stock posting a lackluster gain of only 2.38% in 2021, much lower than the S&P 500’s monster gain of 27% in the same time frame. Yet, Amazon’s fundamental story continues to be strong.

Emarketer expects global retail e-commerce sales to grow from $4.9 billion in 2021 to $7.4 billion in 2025. The market research agency also expects e-commerce penetration in total retail sales to grow from 19.6% in 2021 to 24.5% in 2025. Amazon stands to benefit significantly from these market expansion trends, considering that the company accounted for 37.9% of the online retail sales in North America and 9.8% in Europe in September 2020.

Amazon’s e-commerce sales were lackluster in the third quarter. E-commerce is also a low-margin business and requires significant investment. To overcome these problems, the company is moving away from the first-party model (carrying its own inventories and fulfilling its orders) to third-party sellers. This will help Amazon control costs while offering a broader catalog of products and services.

Moreover, Amazon has also successfully leveraged its online marketplaces to strengthen its advertising business. The company offers advertisers a customer base with high purchase intent while not divulging too much of their sensitive data.

Advertising is categorized under the “Other” business. In the third quarter, revenues of this business grew 50% year over year to $8.1 billion. Emarketer now expects Amazon’s penetration in the U.S. net digital advertising market to grow from 11.6% in 2021 (market value of $24.5 billion) to 14.6% in 2023 (market value of $39.4 billion).

Amazon Web Services (AWS) continues to be the star performer for Amazon, thanks to its market-leading position in a rapidly growing cloud infrastructure market. According to Canalys, global spending on cloud infrastructure services grew 35% year over year to $49.4 billion in the third quarter. AWS accounted for 32% of this global spend, a one percentage point sequential increase in market share. In the third quarter, AWS’ revenues jumped 39% year over year to $16.1 billion. AWS is the key profit driver for Amazon and accounts for over 60% of the company’s total operating income.

With multiple tailwinds in sight, Amazon seems to be ready for a solid growth trajectory in 2022.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.