Summary -The FAANG stocks are an elite group of technology stocks that combine for a market cap of nearly four trillion dollars. The individual companies that make up the FAANG stocks are Facebook, Amazon, Apple, Netflix and Google/Alphabet.
These stocks while narrowly focused in the technology sector are an important driver of economic growth. Their sheer size means that any stock price movement (up or down) can lead to disruptions in the stock market.
These companies are categorized by substantial, and in many cases, insurmountable market share, strong revenue growth, and above average free cash flow. Despite their strong fundamental strength, the companies that make up the FAANG stocks continue to be innovators in their respective niches. Rather than resting on their accomplishments and dominant market position, these companies are using their cash on hand to make investments in cloud computing, artificial intelligence and other technologies that they are projecting will lead to continued revenue growth.
Despite their impressive size and growth, some of the FAANG stocks were also on the leading edge of the tech correction that affected the market in 2018. In fact, many of the FAANG stocks were in a bear market at the end of 2018. Despite the challenges that still remain, many analysts, in particular, sell-side analysts, view the stocks to have valuations that suggest they may be oversold, making them potentially a good buy for investors in 2019.
It’s easy to talk about the good old days. But few investors would ever imagine that the good old days might have been less than 20 years ago. Think about it. Since the turn of the century, there has been so much incredible innovation that continues today. Having a computer on our phone seemed like something in the distant future and we weren't thinking about things like social networks, or streaming services that gave us a true alternative to cable and satellite TV. We vowed we would never do our shopping online and now we have everything sent to our home. When we want to look something up, we say we have to Google it.
Five companies have really changed our lives and have had a tremendous effect on investors who had the foresight to jump in on these businesses when they were still in their infancy. These companies together comprise what have been coined the FAANG stocks. In this article, you’ll learn what the FAANG Stocks are, why they are newsworthy, the outlook for each stock. We’ll also look at whether FAANG stocks are good investments and how to invest in them (particularly for investors of modest means who don’t want to or can’t afford to buy individual shares).
What are the FAANG stocks?
FAANG is an acronym for five individual companies: Facebook, Amazon, Apple, Netflix, and Google (now Alphabet). Aside from the clever name, these five tech companies are grouped together because since each went public they have a proven history of outperforming the market. Not only that, but they are colossal. The five FAANG companies have a collective market capitalization of nearly $4 trillion. To put this in context, these five companies represent approximately 13 percent of the NASDAQ index. Put another way, if the market cap of the collective FAANG stocks was measured as a gross domestic product (GDP), they would be the fourth largest economy in the world.
When the term "FANG" stocks were first made famous by Jim Cramer, Apple was not included. Since then Apple has been added as the fifth company that makes up the FAANG stocks.
Why are the FAANG stocks newsworthy?
FAANG stocks make up approximately 1% of the S&P 500 Index – a broad representation of the stock market. At the end of 2018, the FAANG stocks ranked first, third, fourth, ninth, tenth and sixty-seventh on the Index (Alphabet’s Google has two publicly traded share classes accounting for the ninth and tenth rankings). If you’re familiar with how indexes work, it’s easy to understand how movement, positive or negative, by the FAANG stocks can be disruptive not only to the S&P 500 Index but, by extension, the broader market.
The FAANG stocks have a history of outperforming the market. The growth of these companies is almost legendary. But whereas some stocks grow and fizzle just as fast, these companies have a proven track record of increasing their earnings year after year, which makes them valuable from price to earnings (P/E) perspective. These are important fundamental benchmarks for money managers on Wall Street as well as the average investor on Main Street.
However, as any savvy investor who lost a significant chunk of their portfolio in the tech crash of the early 2000s will tell you, outperformance only tells you the “what”. The real question is why? In the case of the FAANG stocks, they have the attention of Wall Street because of the way they have captured the minds, hearts, and wallets of consumers. There’s a good chance you are reading this article on your phone, tablet, or other mobile devices. These were items that didn’t exist 20 years ago. If you're like many consumers, you are probably using that same device to stream content from Netflix or using it to order your groceries – which will be delivered right to your door.
Simply put, these stocks are popular because they have changed, and are continuing to change the way consumers interact with and think about, technology.
What is the outlook for the FAANG stocks?
There are “big picture” concerns for every FAANG stock, but because each one of these companies comes to the market in a different way, it’s important to look at each of them individually.
- Facebook – Of the five FAANG stocks, Facebook is the company consumers love to hate. That doesn’t necessarily mean they’ve stopped using the platform (the company still cites 2.27 billion monthly active users) – or its apps. And that’s where the company showed its strength. At the end of 2018, four out of the five most downloaded apps were part of Facebook including Facebook, Messenger, WhatsApp, and Instagram. The strength of Facebook is in its ability to entice advertisers. Right now, when it comes to getting eyeballs on ads, Facebook is still the best game in town by far.
- Apple – Apple was the first trillion-dollar company (in terms of market cap), but the company did have a rocky fourth quarter. The bad news focused on the company’s outlook for a decline in iPhone sales. The iPhone is the company’s signature product and the conventional wisdom was that the new iPhone X would be the next big sales driver. Still, Apple is well positioned to benefit from the rollout of 5G networks (and the associated tech upgrades). Plus, despite being the only one of the FAANG stocks to issue a dividend, the company is still sitting on a pile of cash (approximately $237 billion).
- Amazon – It’s not a good thing when the White House is threatening you with regulation. But that’s to be expected when your company captures 49.1% of all online sales (that’s not a misprint). But despite the “Amazon effect” that continues to change consumer shopping habits, Amazon continues to focus on what’s next. In this case, they are making a move to cloud computing, with their Amazon Web Services (AWS) which has become the real growth engine for Amazon.
- Netflix – Like Facebook, Netflix does not suffer from a lack of competition. But the streaming content provider continues to add new subscribers (nearly 7 million in the third quarter of 2018 alone) and much of that growth is coming from international markets. The company is burning through cash – which is something that will bear watching – particularly as it continues to incrementally increase prices to its subscribers.
- Google/Alphabet – With a market share for search of over 90%, Google really has no competition. The company continues to dominate the digital ad market. And the company owns YouTube –which in terms of active users is second only to Facebook in the social media space. The company is also embedded in many companies with its Google suite of products.
Are FAANG stocks a good investment?
This is the question that seems to get asked every year. The question is being raised even more after 2018 that saw these stocks go on a roller coaster ride that had ripple effects on the entire market. After several years of growth that looked like it would never stop, each of these stocks came under pressure in 2018. In fact, as the fourth quarter of 2018 came to an end, every FAANG company had seen it's market value decline by 20 percent or more – putting them in a bear market territory.
To be fair, some of this was profit taking from institutional investors who question if even well-managed companies like these can continue to generate continuous earnings growth. That question is particularly important for technology stocks, which are known for volatility. However, the growth of these companies is only part of the story.
When companies grow to the size of these companies – and they do business in a sector that mines data about the personal data and habits of their customers - it’s only natural that there will be questions. Facebook, and to a lesser extent Google, have faced questions about user privacy. Netflix is facing challenges from Disney and AT&T who are making major investments into streaming content. Even Amazon is starting to face calls for regulation as part of a backlash from consumer advocacy groups who are concerned about the company’s giant footprint even as Amazon continues to extend its reach into different areas of consumer’s lives.
However, despite the challenges that face these companies, they each continue to dominate their respective industries in terms of market share. There is little reason to believe that any of these companies will suffer from a significant decline in revenue growth and all should continue to have positive, and significant, free cash flow.
For investors looking at more technical measures, the stock valuations of these tech stocks, while certainly not low enough to consider them great values, are down significantly from their lows. This means that given current estimates on sales, revenue and earnings, sell-side analysts are giving the FAANG stocks a buy rating.
How to invest in the FAANG stocks?
Every FAANG stock trades on the NASDAQ stock exchange. The NASDAQ is comprised of over 5,000 companies, many in the coveted tech sector. FAANG stocks also make up approximately 1 percent of the S&P 500 Index – a broad representation of the stock market. At the end of 2018, the FAANG stocks ranked first, third, fourth, ninth, tenth and sixty-seventh on the Index (Alphabet’s Google has two publicly traded share classes accounting for the ninth and tenth rankings).
The FAANG stocks are considered momentum and growth stocks. At the present time, Apple is the only one of the companies that pays a dividend, although there is increasing speculation that other companies, most notably Facebook, may begin to issue a dividend. However, growth comes at a price for individual investors. As of this writing, the stock prices for the FAANG stocks were as follows:
- Facebook (FB)- $170.11
- Amazon (AMZM) - $1,700.98
- Apple (AAPL) - $175.52
- Netflix (NFLX) - $350.75
- Google/Alphabet (GOOGL) - $1,164.22
That means for an investor to purchase a single share in each of these stocks would cost $3,561.58. For the average investor, that’s a lot to tie up into five stocks, even if they do represent the five largest stocks in the tech sector. The good news is that institutional investors and portfolio managers love the FAANG stocks, so an investor can benefit from owning a piece of the FAANG stocks as part of a mutual fund, index fund (as long as it follows the S&P 500 Index), or exchange-traded fund (ETF).
The bottom line on FAANG stocks
Unless you’ve been completely ignoring the stock market for the past decade, you’re familiar with the FAANG stocks. FAANG is an acronym for the five companies that make up this select group of technology stocks (Facebook, Amazon, Apple, Netflix and Google/Alphabet). Apple has been added in recent years but was not part of the initial FANG stocks.
These are the stocks that you have read about in financial newsletters that trumpet headlines like "It's like getting in on XX at $5 per share". And indeed, for investors that were fortunate enough to buy these stocks when they first became publicly traded, they have been rewarded with impressive earnings. The sheer size of these companies and the effect it has on the stock market was in full effect in 2018 when these stocks saw major swings that disrupted the broader market. The turbulence in these stocks was due in part to privacy concerns, the ongoing tariff war with China, interest rate concerns and increasing concern about whether or not they would be subject to stronger regulation.
However, despite some underlying concerns, these stocks remain extremely influential. The popularity of the underlying technology, products, and applications of these companies is part of the engine that drives their growth. These companies are also constantly evolving and are currently exploring areas like cloud computing and artificial intelligence that should keep these companies relevant for many years. This constant push towards the next new thing makes these tech stocks highly growth oriented. In fact, although all of the FAANG stocks have healthy cash positions, only one of the FAANG stocks, Apple, currently pays a dividend.