In financial terminology, FAANG or FAANG stocks is a well-known acronym that describes the stocks of the most prominent technology companies. These are Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (formerly known as Google). The term was introduced by Jim Cramer, the television reporter at CNBC. in 2013. Initially, the acronym was named FANG, but in 2017 Apple was added to the group, and the name was changed to FAANG, as it is today.
These stocks make a significant share of the S&P 500 index as it is the investment, where many investors have some exposure. Moreover, they make a great impact on the broader stock market. In the past decade, these five stocks have grown at a faster pace than the S&P 500 index and than technology-based Nasdaq index. So definitely, all investors should follow and learn something about these five stocks.
All these tech giants are well-known to consumers, and they are leaders in their niche. They rule online networking and social media, streaming video services, e-commerce, cloud-computing, devices, and gadget sales worldwide. Apple is one of the biggest smartphone manufacturers in the world. At the same time, Netflix is a leader of subscription on-demand video. Alphabet posses number one in the Internet search engine. Facebook’s online networking and social media dominance are as vast as Amazon’s presence in e-commerce and cloud-computing infrastructure. In January of 2020, their combined market capitalization was $4.1 trillion.
Why are these companies different?
FAANG stocks represent the most popular and the best performing technological companies that are among the largest ones in the world. They all are dominant in their markets. Their recent growth has been accelerated by high-profile purchases by large and very influential investors like Berkshire Hathaway, Soros Fund Management, and Renaissance Technologies. Since they have strength, growth, and momentum, they still have been a desirable investment.
FAANG stocks combined represent 15% of the S&P 500, an index that is considered as a figure for measuring the strength of the US market. This fact proves how these five stocks have a large impact on the whole US economy. For example, in the first eight months of 2018, FAANG stocks made 40% of the total S&P gain in that period.
Naturally, a large and prominent move upside always raises concerns that the asset might be in bubble territory. It also happened with FAANG stocks. In November 2018, technological shares started to lose its strength; some of them lost more than 20% of their value and have entered a bearish territory. Though these losses were quickly recovered, FAANG stocks demonstrated its volatility witch raised concern among some investors. Definitively these stocks have great fundamental strength, so let’s examine each company in greater detail.
The Facebook company is a leader in social media. It owns two biggest social media platforms; Facebook and Instagram, and also two biggest messaging applications; WhatsApp and Messenger. Most of its earnings are made through advertisements that are displayed to their application users.
Amazon is the biggest B2C (Business to Consumer) company in the world. It posses an online marketplace platform with 150 million global subscribers in prime membership. Though e-commerce makes the majority of its revenues, a respectable portion is also yielded through cloud computing and advertising,
Apple is the biggest US smartphone producer and one of the biggest companies in the world. This niche accounts for most company’s revenues. It is also offering higher-margin subscription services, which include streaming videos and music, gaming, news, and cloud computing.
Netflix is one of the first internet companies. It started its big raise in 2007 when it shifted from DVD by mail service to on-demand streaming. In 2012 it began investing in its original content for the streaming service. Nowadays, it is one of the biggest buyers of film and television production in the world as it counts over 160 million subscribers worldwide.
Alphabet started its business under the name Google as an internet search company. Today it is conglomerate that unifies Google and Other Bets. Its stellar rise was propelled by acquisitions and by developments of consumer-facing products. Google also has a cloud computing and hardware business. Other Bets segments include Waymo, an automated-vehicle business, and Verily, a health researcher.
There have been bids to include other companies in this group. The most notable ones are Microsoft (MSFT), the owner of the Windows operating system, Broadcom (AVGO), a leading chipmaker, Adobe(ADBE), leading marketing software and digital media firm, and Uber Technologies (UBER), a global taxi company.
Why invest in FAANG?
We have seen that FAANG stocks have historically outperformed the S&P 500 index. Since March of 2009, when the index was at the bottom, Apple, a worst-performing FAANG stock, returned two times more than the index average. Although past success does not guarantee anything in the future, FAANG companies still can be a good long-term investment?
Well, we have already seen that they possess several competitive advantages and benefit from the network effect. Facebook has over 2.5 billion active users, and for that reason, it is attractive to new ones. The same stands for Google’s YouTube videos and search engine. Amazon’s market place has 10 million customers every day, and it is making its service attractive to the merchants. Netflix, with its 10 million daily viewers, is receiving feedback on which content has greater demand, so it tells in what kind of content should the company invest. Apple users will have high additional costs if they switch off from their iOS platform. These advantages make FAANG stocks a great potential investment.
The Facebook stock reached its peak of $241.21 on 10th June 2020. Since its IPO in 2012, which was priced at $45, the stock fell to a minimum of $17.55 in August of the same year. Since that, the company has been on the rise to reach the current level. In 2018 we noted higher volatility due to the Cambridge Analytica scandal. The stock declined ~40% sharply to $123.02. This year, 2020, it has also been very volatile, mainly due to the COVID pandemic, it reached $224.20 level than it fell to $137.10 and after that, we noticed the current top. The average annual growth rate for the stock is 33.30%.
Apple stock reached the top on 17th June of 2020 at $355.40. At the beginning of 2010, its value was $30.49. Over the next eight years, it was on the constant rise. In 2018 it also noted higher volatility. After it reached a peak in that year at $233.47, it fell to $142.00. The same thing happened in 2020 when it fell from $327.85 to $212.61. The average annual growth rate is 25.42%
Amazon started 2010 at $136.25, and since then, it was on the rise till the peak on 10th June 2020 at $2722.35. In 2018 it also faced higher volatility when the stock fell from $2050.50 to $1307.00. The average annual growth is 29.79%.
Netflix stock was at $7.93 at the beginning of 2010, and like all stock from the group, it was on a steady rise till 2018 when it reached $423.21 level. After that, it has a slightly different pattern from the others in the group. It fell in the same year to $231.23, and then it was ranging for the next two years between 2018’s top and bottom. Finally, the resistance was broken in 2020 when it peaked on 19th May at $458.97. The average annual growth is 45.83%.
Alphabet company was introduced in 2014 and started trading at $566.47, and since then, it was on the rise. Like other stocks in the group, it also had higher volatility in 2018 and 2020. It peaked on 19th February at $1532.11. The average annual growth is 18.73%.
All these stocks are at high pressure at the moment. Google and Amazon are under threat after being inspected by regulators for anti-competitive business practices. Google and Facebook are heavily criticized for the lack of data privacy and security. They also faced a high drop in advertising spending due to the COVID pandemic.