In the world of high-growth investing, there is one group of companies that stand out head over shoulders the rest — the FAANG stocks (Facebook, Amazon, Apple, Netflix, Google).
Since the economic crisis of 2008-2009, all FAANG stocks have outperformed the market. In fact, the worst performing FAANG stock during this period — Google (Alphabet) — doubled returns compared to the S&P 500. All this while keeping a low level of volatility (when compared to other growth stocks), thereby providing the sought-after stability that investors look for.
Beyond the advantage of low relative volatility and high returns, FAANG stocks have continued to innovate, creating new products and expanding the market for existing ones.
This commitment to continuous innovation, in keeping with the advances of the globalised world, has helped FAANG stocks maintain their global competitiveness.
In this article, we’ll introduce you to the FAANG stocks by considering:
- The history of FAANG stocks
- Overview of the five FAANG stocks
- Why investors love FAANG stocks
- How to buy FAANG stocks
1. The history of FAANG stocks
In 2013, Jim Cramer, the host of CNBC’s “Mad Money,” a financial TV show, coined the acronym “FANG stocks.”
At the time, Jim focused on the stocks of Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL), four technology companies with certain commonalities: stable returns and outsized market appreciation, significant growth in stock prices, market domination, and the use of digitisation and the web.
However, in 2017, analysts added Apple (AAPL) to the mix as it showed similar characteristics to the original four FANG stocks, especially due to the remarkable growth of Apple’s app store services. Since 2017, FAANG has replaced FANG in popular investment vocabulary with the addition of Apple.
FAANG stocks are traded on NASDAQ, a securities exchange that lists more than 3,000 American technology companies.
NASDAQ (National Association of Securities Dealers Automated Quotations) was created in 1971 to provide investors with an electronic stock exchange that removes the inefficiencies of the manual system.
The computerised trading exchange has deployed technology to provide a faster, more efficient, and more transparent way for investors to buy and sell securities.
Due to its employment of technology, it was only inevitable that tech companies would prefer to list their securities on NASDAQ.
Since then, NASDAQ has been identified as the exchange for tech companies. Analysts use the movements in the NASDAQ Composite Index to understand what’s happening in the technology industry.
To put into perspective just how influential FAANG stocks are, at the time of writing these companies have created a combined market capitalisation of $6.8 trillion.
The S&P 500 Index, which tracks the performance of the largest 500 companies in the US, has a market cap of $35.58 trillion. This means that FAANG stocks account for 19% of the total S&P 500 Index, which is used as an indicator of what’s happening to the whole US market.
Consequently, FAANG stocks now account for 19% of the US market.
2. Overview of the five FAANG stocks
Founded in 2004 by Mark Zuckerberg, Facebook went public in 2012. Since then, it has grown to become the biggest social media platform in the world, with more than 1.8 billion daily users globally.
It now owns four of the most popular social media platforms in the world – Facebook, Instagram (acquired in 2012), Facebook Messenger, and WhatsApp (acquired in 2014).
The company’s primary revenue model is online advertising. It charges business owners to advertise their products and services to the billions of Facebook users who use their platforms for free.
While it has already monetised Facebook and Instagram, Facebook has not yet monetised WhatsApp and Instagram (which means possible opportunities for revenue growth in the future).
Facebook has also recently invested in the virtual reality (VR) world by purchasing Oracular VR (in 2014).
To perfect its advertising algorithm and news feeds, it has continued to invest in machine learning and artificial intelligence.
Historical performance
Facebook went public on May, 18, 2012 at $38 per share. It closed on that day at $42.05.
At the end of 2012, it closed at $26.62, a 30% drop from its IPO price ($38). A year later, at the end of 2013, it had grown to $53.71, a 102% increase.
At the time of writing, a share of Facebook is worth $332.29, a 774% increase from its IPO price, at an annualised return of 86%.
Current Summaries
Market cap: $942.20 billion
Dividend: Not Available
EPS (earnings per share): 11.66
P/E ratio: 28.47
1-year return: 39%
5-year return (annualised): 38%
10-year return (annualised): NA
Amazon
Amazon was started by Jeff Bezos as a book renting platform in 1995. Now, it has grown to be the biggest e-commerce platform in the world, with 150 million users of its shopping app in the United States.
Amazon has also invested in cloud computing through its Amazon Web Services, with more than 1 million users globally. Its more recent introduction,Amazon Prime, an online streaming service now has 150 million users.
It also sells consumer electronics such as Amazon Kindle and Amazon Echo. Amazon also has ongoing investments in IoT solutions.
Andy Jassy became the CEO of Amazon on July 5, 2021.
Historical performance
Amazon went public on May 15, 1997 at $18 per share ($1.50 when adjusted for stock splits). It closed on that day at $1.73, adjusted for stock split.
At the end of 1997, a share was worth $4.85.
From that time the stock has continued to grow, trading at $3,485.87 at the time of writing, a growth of 232,291% from its IPO stock split-adjusted price, at an annualised rate of 9,678%.
Current Summaries
Market Cap: $1.74 trillion
Dividend: Not Available
EPS: 52.56
P/E ratio: 66.23
1-year return: 29%
5-year return (annualised): 78%
10-year return (annualised): 172%
Apple
Apple was started in 1976 by Steve Jobs, Steve Wozniak, and Ronald Wayne. It started off with the sale of personal computers. Now it sells personal computers, smartphones, and other electronics (iPads, iPods, smart watches, etc.). Currently, there are a billion iPhone users in the world.
Unlike other personal computers and smartphone manufacturers, Apple manufactures its hardware and software (IOS).
Apple also has a music streaming app — Apple Music (with 72 million users) — among other self-made apps on the iStore (e.g,. Apple books).
The tech giant also has invested in cloud storage with its iCloud storage and TV streaming with Apple TV+. The company’s operations are currently managed by Tim Cook, its Chief Executive Officer.
Historical Performance
Apple went public on December 12, 1980 at an IPO price of $22 per share ($0.12 when adjusted for splits). It closed in 1980 at $0.16 per share.
At the time of writing, a share of Apple is worth $132.09, a 109,975% increase from its IPO price (adjusted for stock split), at an annualised rate of 2,682%.
Current Summaries
Market Cap: $2.21 trillion
Dividend: 0.88
EPS: 4.45
P/E ratio: 29.70
1-year return: 47%
5-year return (annualised): 91%
10-year return (annualised): 105%
Netflix
Netflix was launched by Reed Hastings (who still serves as its CEO) and Marc Randolph on August 29, 1997 as a subscription service that allowed people to rent DVDs by mail.
In 2007, it pivoted to an online movie streaming service.
More recently (2012), Netflix has begun to produce its own original content as a way to stay above the fray and take on Hollywood, providing a generational shift in competition via the movie streaming industry.
Currently, 208 million people use Netflix worldwide.
Historical Performance
Netflix went public on May 23, 2002 at an IPO price of $15 (adjusted for stock split at $1.21). The stock ended the year at $0.70 per share. A year later, it had picked up and closed at $4.06.
At the time of writing, a share of Netflix is $496.02, a 40,893% increase from its IPO price (adjusted for stock split), annualised at 2,155%.
Current Summaries
Market Cap: $220.37 billion
Dividend: Not available
EPS: 8.26
P/E ratio: 60.14
1-year return: 6%
5-year return (annualised): 90%
10-year return (annualised): 122%
Google (Alphabet)
Google, now formerly managed under the parent company Alphabet, is the number one search engine in the world with 3.5 billion searches everyday. It was founded in September 1998 by Larry Page and Sergey Brin.
Google also owns YouTube, a video sharing and social media platform with over 2.5 billion monthly users. Google also owns Google Maps, Google Playstore, Google Drive, Google Chrome, among other services.
Google’s main revenue driver is advertising displayed through its search engine and other apps.
In 2015, it also introduced a music streaming service – YouTube Music. Google is also the owner of Android, the operating software powering 72.72% of smartphones.
Google also has investments in biotechnology, self-driving cars, and smart cities.
Its activities are currently managed by Sundar Pichai, its Chief Executive Officer.
Historical Performance
Google went public on August 19, 2004, with an IPO price of $85 per share. At the end of the year, it closed at $98.90.
At the time of writing, a share of Google is worth $2,422.18, a 2,750% increase from its IPO price, at an annualised rate of 162%.
Current Summaries
Market Cap: $1.69 trillion
Dividend: Not available
EPS: 75.04
P/E ratio: 32.28
1-year return: 67%
5-year return (annualised): 48%
10-year return (annualised): 89%
FAANG or FAANGM
Since Jim Cramer introduced the acronym FAANG, there have been attempts to modify the acronym.
Some have suggested FATANG, to include Tesla, while others have suggested FAANGM, to include Microsoft.
Currently, FAANGM is more popular, so we will focus on Microsoft a bit.
How does Microsoft compare to the others?
Microsoft has a $1.5 trillion market cap, which is higher than Netflix and Facebook.
Founded by Bill Gates and Paul Allen in 1975, it’s also a high tech company that sells apps like Microsoft Office (with 1.2 billion users), Microsoft Office 365, and Microsoft Edge. It has also invested in the cloud storage world with Microsoft One Drive (250 million users as at 2014). Microsoft has been doing a lot in cloud computing with Microsoft Azure, which is rivaling Amazon Web Services.
Its operations are currently managed by Satya Nadella, the Chief Executive Officer.
Microsoft is also a growth stock. It went public on March 13, 1986 at an IPO price of $21 (adjusted to $0.10 for stock split) and closed at $0.17 at the end of 1986.
The stock now trades at $264.14, a 264,040% increase from its IPO price (adjusted for stock split), at an annualised rate of 7,544%.
Current Summaries
Market Cap: $1.5 trillion
Dividend: 2.24
EPS: 7.34
P/E ratio: 36.02
1-year return: 32%
5-year return (annualised): 84%
10-year return (annualised): 97%
All the above shows that Microsoft is indeed comparable to the FAANG stocks.
However, where Microsoft competes directly with any other FAANG stocks, they tend to have a smaller market share (Edge versus Chrome, One Drive versus Google Drive, Azure versus Amazon Web Services).
Today, it remains to be seen if Microsoft can dominate their markets as well as any of the main FAANG stocks.
While FAANGM should interest investors, FAANG remains the dominant point of analysis for analysts and of primary interest for investors.
3. Why investors love FAANG stocks
Why then have FAANG stocks become so popular among investors?
Put differently, why are FAANG stocks now 19% of the entire US market?
FAANG stocks are growth stocks
The reason why we invest is to earn returns and grow our money. Therefore, investors are naturally drawn to investments that provide high returns.
Stocks that grow their prices significantly and consistently are called growth stocks.
This large increase in prices provides investors with huge returns on investment. And this is why investors love growth stocks (who doesn’t love high returns, right?).
FAANG stocks are growth stocks on steroids in many respects. We have seen remarkable growth in the prices of these stocks over the years, as noted above.
Such incredible historical growth is one reason why many investors continue to love FAANG stocks. But this isn’t the only reason.
Growth plus relative stability
Though growth stocks provide incredible returns, they are also very volatile. The same growth stock that can rise significantly can also fall significantly.
However, compared to other growth stocks, FAANG stocks are more stable.
This is due mostly to the dominance that each FAANG company enjoys in its market and the fact that they are larger and more well established.
A related reason is their high market cap, as market cap is inversely related to volatility.
FAANG stocks are more innovative and forward-looking
While they are already dominant in their markets, FAANG companies are always innovating, producing or deploying the latest technology to introduce new products or expand the market for old products.
This can be seen from the numerous products, investments, and innovations of these companies as listed above.
The point here is that these innovations and expansions give many investors the certainty that they will remain stable whatever the future brings.
Also, new technologies and products tend to make a lot of money for early investors when they are successful. This means the interest of these companies in new technologies and innovation can further improve their growth potential.
Global acceptance and dominance of FAANG products
Many of the products and services that the FAANG companies produce are ubiquitous.
Facebook, Instagram, WhatsApp, Google, YouTube, iPhone, E-commerce, Netflix, etc. have become a dominant part of people’s lives across the world.
For example, as noted above, 1.8 billion people use Facebook every day, more than 2 billion use YouTube every month, Google processes 3.5 billion searches per day, more than 1 billion people use iPhones, and more than 150 million people use Amazon Prime and the same number used the shopping mobile app in 2020.
No wonder that during the Covid-19 pandemic, FAANG stocks were still stable. Between January and November, 2020, Facebook gained 29% in stock price, Apple, 61%, Amazon, 77%, Netflix, 64%, and Google, 14%.
With such a huge number of users and a continuous commitment to innovate, investors trust that FAANG stocks will keep growing.
Cons to consider
Despite all the advantages of FAANG stocks, they are not all beds of roses.
One of the biggest problems with FAANG stocks is their volatility.
All of them, except Netflix, have a beta that is greater than 1, which makes them a little bit more volatile than the market (even if they are less volatile than other growth stocks). (Note: Beta is a statistical measurement of how much an asset changes in respect to the whole market. If beta is less than 1, the asset does not change as much as the market; if it’s equal to 1, the asset changes at the same rate as the market; if it is greater than 1, the asset changes more than the market)
Also, technology tends to change more rapidly and the leaders of today can become laggards tomorrow. For example, Yahoo was once synonymous with the internet, but crashed after the 99’ dot-com bubble and has never fully recovered, only to be replaced by current-day heavyweights such as Google.
In fact, the certainty of winds of disruption is why Warren Buffet preferred Coca Cola stock to the popular internet stocks of the late 20th century.
Secondly, some analysts still believe that these stocks are overpriced (their intrinsic value is less than their market prices).
Consequently, according to financial analysts, investors are paying more than necessary for these stocks and their returns would be less if the stocks were rightly valued.
Similarly, they believe the potential for growth going forward is limited.
“It’s really hard for us to rationalise a stock that’s worth $500 billion to a trillion going up another 50 or 100 percent,” said Walter Price, Senior Portfolio Manager at Allianz Technology Trust, about Facebook and Google in 2018.
Some analysts are worried that the FAANG stocks are a bubble that will soon burst, reminiscent of the dot com bubble and burst of the late 1990s and early 2000s.
Nick Clay, a portfolio manager, shared this concern: “Back in the tech bubble, the five largest stocks represented 17% of the S&P. At the beginning of 2020, they represent 17.3% of the S&P…It shows you how the concentration of the market in these five biggest stocks is reaching peaks again.”
However, these fears have not stopped impassioned interest in FAANG stocks. Even Warren Buffet now owns considerable stock in Amazon and Apple.
Another large concern has been the regulatory hot water that some of these companies have found themselves in.
“Amazon.com and Google have come under regulatory scrutiny for possible anti-competitive business practices,” said Patrick Seitz, consumer technology writer at Investor’s Business Daily.
“Facebook and Google have been criticised for lack of data privacy and security. And Netflix is confronting a flurry of new competitors in streaming video as well as a heavy debt load associated with content production.”
It remains to be seen how all of this will work out going forward.
4. How to buy only a fractional share of FAANG stocks
The major problem investors have with purchasing some FAANG stocks is price.
For many investors who are not HNWI (high net worth individuals), buying a share of Amazon or Google is challenging.
One of the solutions that Sarwa Trade provides is that you can buy a fraction of any stock. If you don’t have $3000+ to invest in a share of Google, you can buy just 10% at $300+, or less.
So, instead of buying a full share of each FAANG stocks, you can buy each according to how much you choose to spend.
Consequently, there is no minimum account balance requirement, and ou can start trading with as low as $1.
If you have any questions on how to get started on your investment journey, schedule a call with a Sarwa Wealth Advisor and we’ll answer all your questions.
Takeaways
- FAANG stocks are high-growth tech stocks with large market cap.
- FAANG stocks include Facebook, Amazon, Apple, Netflix, and Google stocks.
- Investors love FAANG stocks because of high returns, stability, market dominance, innovation, and their ubiquitous use on a global scale.
- If you’re looking to buy FAANG stocks, Sarwa Trade provides that option for you with fractional shares.