FAANG is an acronym that refers to five of the most prominent US technology companies—Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOGL), the letter G in FAANG represents Google, Alphabet’s subsidiary). When CNBC’s “Mad Money” host Jim Cramer originally coined the term it was just FANG, but in 2017 another ‘A’ was added to include Apple.
More about the FAANG Stocks
Facebook (FB): The leading social media company has a market cap of about $836 billion (as of Nov. 6). Aside from the namesake social networking site Facebook, the company also owns Instagram and the highly popular WhatsApp and Messenger apps. As of September 30, there were 2.54 billion daily active people (or DAP) using these services. Facebook generates revenue through the ads displayed on its sites and apps.
Amazon (AMZN): Amazon is the largest e-commerce retailer in the world. The company generates revenue through the online sale of products, subscription services like Amazon Prime, and its cloud computing platform AWS or Amazon Web Services. Though the company’s e-commerce business generates a significant portion of its revenue, it is the AWS unit that is more profitable. Currently, Amazon has a market cap of $1.66 trillion.
Apple (AAPL): Known to be one of the most innovative companies in the world, Apple is popular for its iPhone smartphones, iPads, Mac, Apple TV, and Apple Watch. After making a mark through its premium devices, the company is also boosting its revenue through its higher-margin services business, which includes App Store, AppleCare, cloud services, Apple Music, Apple TV+ and Apple Pay. Apple was the first US publicly traded company to reach $1 trillion market cap and then the $2 trillion market cap mark. Currently, its market cap stands at $2.06 trillion.
Netflix (NFLX): Netflix might be the smallest company among the FAANG stocks in terms of market cap ($227 billion), but it has tremendously grown from a DVD-rental business to a pioneer of streaming services. The SVoD (Subscription Video on Demand) leader currently has over 195 million paid memberships in more than 190 countries.
Alphabet (GOOGL): Alphabet’s (market cap $1.19 trillion) business segments include Google (comprises revenue from ads, Android, Chrome, hardware, Google Cloud, Google Maps, Google Play, Search, and YouTube) and Other Bets (Access, Calico, CapitalG, GV, Verily, Waymo). Currently, the company derives a substantial portion of its revenue from ads while the contribution from Other Bets is not material. The Google Cloud business includes Google Cloud Platform, Google Workspace productivity tools, and other enterprise cloud services.
Should you invest in FAANG stocks?
The FAANG companies are considered game-changers in their respective sectors, have strong brand value, and attract a lot of attention from Wall Street. FAANG stocks have generally outperformed the broader market. Over the past five years, stocks of Facebook, Amazon, Apple, Netflix, and Alphabet have risen about 182%, 416%, 323%, 397%, and 138%, respectively compared to the 73% rise in the S&P 500 Index.
So far in 2020, Facebook, Amazon, Apple, Netflix, and Alphabet have advanced about 43%, 79%, 62%, 59%, and 31%, respectively, and have outpaced the 9% rise in the S&P 500 Index. (Note: All stock movements are as of November 6, 2020).
Facebook recently reported higher ad revenue growth in 3Q despite challenging market conditions amid the pandemic. Meanwhile, it is seeing strong prospects for non-advertising revenue drivers like Oculus (virtual reality headsets). However, the slowdown in user growth in the US and Canada and antitrust concerns are risks associated with Facebook.
Amazon disrupted the traditional brick-and-mortar retail market with its e-commerce business model and continues to grow at a strong pace. Adding to its strength, the company has established itself as the leading cloud computing company with its AWS unit. The pandemic has further boosted the demand for Amazon’s e-commerce as well as cloud businesses and there is plenty of room to grow in both these markets.
Apple’s brand name and innovation help it command a premium price for its products like the iPhone, which is its largest revenue contributor currently. Customers eagerly look forward to Apple’s iPhone upgrades. However, the intense competition in the smartphone market has been impacting the iPhone’s growth. The company is looking for growth in its services and wearables businesses to mitigate the deceleration in the iPhone growth rate.
Netflix has the first-mover advantage in the streaming services market and boosts a huge subscriber base. The company’s original content drives customer loyalty. However, Netflix is now facing intense competition from Amazon Prime Video, Disney+, Apple TV+, Hulu, and HBO Max.
Alphabet’s Google continues to be the most dominant search engine and the key source of ad revenues. The company is now focusing on other growth areas also like YouTube and Google Cloud. Risks associated with Google include an antitrust lawsuit filed by the US Department of Justice alleging that the company is using anticompetitive practices to maintain the monopoly of its search engine.
Currently, Facebook, Amazon, and Alphabet score a Strong Buy analyst consensus while the Street has a cautiously optimistic Moderate Buy consensus for Apple and Netflix. Given the YTD rise in FAANG stocks, the average analyst price target for these stocks (as of Nov. 6) indicates an upside potential of about 10%, 15%, 7%, 13%, and 10%, respectively, in the coming months.
FAANG ETFs (or Exchange Traded Funds) are those funds that have at least 1% exposure to each of the FAANG stocks. Note that in the case of Alphabet, these ETFs have at least 1% exposure to either Alphabet Class A shares (GOOGL) or Alphabet Class C shares (GOOG). These ETFs help the investor have a diversified portfolio instead of exposure to only one stock.
Some of the FAANG ETFs are Invesco QQQ Trust (QQQ), iShares Expanded Tech Sector ETF (IGM), NYSE Technology ETF (XNTK), Communication Services Select Sector SPDR Fund (XLC), the Vanguard Communication Services ETF (VOX), and the Fidelity MSCI Communication Services Index ETF (FCOM).
FAANG stocks stand out due to their dominant position in the key growth areas of the tech industry. Their brand names and huge user/customer base and technology give them a competitive edge. However, investors should not put their money in these stocks based on just past performances but should consider their valuation and potential growth in earnings, associated risks, and competitive landscape before investing.