The FAANG stocks have been market-beating investments over the past decade, and the success of these tech giants is due in part to a few common qualities. All five companies represented by the acronym — Meta Platforms‘ Facebook, Amazon, Apple, Netflix, and Alphabet‘s Google — benefit from a strong market presence and a big market opportunity, which has fueled years of dazzling revenue growth. The next generation of FAANG stocks — in other words, the next businesses that weave themselves into daily life with disruptive technology — will likely share those same traits.
Here are two growth stocks that could make the cut.
Block (NYSE: SQ) is disrupting the financial services industry with two product ecosystems. Its Square platform blends all the hardware, software, and services merchants need to run their businesses across physical and digital channels. That includes basic products like point-of-sales systems and payment processing, as well as more sophisticated tools like marketing and team management software.
Similarly, the Cash App platform allows consumers to deposit, borrow, spend, and invest money, and file taxes, from a single mobile application. It is also becoming a commerce discovery and shopping tool, as Block is integrating the Afterpay Shop Directory into Cash App. That expansive offering has the platform growing quickly. Cash App monthly active users (MAUs) climbed 22% to 44 million in 2021, and profit per MAU ticked up 13% to $47.
Block’s disruptive approach to financial services is resonating with merchants and consumers, which has led to impressive financial results. Over the past year, gross profit soared 50% to $4.8 billion, and the company generated $1.1 billion in cash from operations, up from $23 million in the prior year.
Block’s integration of Afterpay could supercharge growth by unlocking synergies between its two product ecosystems. Square sellers should see an uptick in sales, as buy now, pay later products typically lead to better conversion rates and bigger order sizes. Sellers can also deliver targeted product suggestions to Cash App consumers to drive future sales. Additionally, 140,000 merchants already accept Afterpay, and Block sees an opportunity to bring those businesses into the Square ecosystem.
Block currently puts its U.S. market opportunity at $190 billion in gross profit, but the company also operates in Japan, Australia, Canada, and several European countries, meaning its total addressable market is even bigger. With that in mind, Block certainly has a chance to be part of the next generation of FAANG stocks, and investors should consider buying a few shares today.
Cloudflare (NYSE: NET) specializes in cloud computing. It offers a range of application, network, and zero-trust security services, which collectively accelerate and protect business-critical infrastructure while freeing customers from the burden of managing costly and complex hardware on-site.
Internet users may not realize it, but many of them benefit from Cloudflare services on a daily basis. In fact, its content delivery network powers over 19% of the internet, while the next closest cloud vendor has less than 2% market share. That strong adoption can be attributed to Cloudflare’s vast global network — which sits within 50 milliseconds of 95% of internet users worldwide — and its freemium pricing model.
Cloudflare has further differentiated itself through unparalleled performance. Internal studies have shown that its platform is faster than other edge clouds like Fastly, and public clouds like Amazon Web Services and Alphabet’s Google Cloud. Additionally, Forrester Research recently recognized Cloudflare Workers as the leading edge development platform, citing a stronger current offering and a stronger growth strategy than any rival.
Not surprisingly, that strong market position has translated into consistent top-line growth. Over the past year, revenue climbed 53% to $731 million, and the company generated $6 million in cash from operations. That meager cash flow may worry some investors, but Cloudflare puts its market opportunity at a whopping $135 billion by 2024, and management plans to run the business at breakeven for the foreseeable future to capitalize on that opportunity.
On that note, Cloudflare’s penchant for innovation has been a significant growth driver in the past, and it should continue to be a tailwind in the future. The company introduced several new services in 2021, including email security and cloud storage, and it recently announced D1, a managed database that will simplify application development on the Workers platform. CEO Matthew Prince expects D1 to “quickly become one of the largest databases in the world.”
To summarize, given its past execution, strong market position, and capacity for innovation, Cloudflare could certainly be part of FAANG 2.0, and investors should consider buying this growth stock today.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon, Block, Inc., and Fastly. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Block, Inc., Cloudflare, Inc., Fastly, Meta Platforms, Inc., and Netflix. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.