"FAANG" is an acronym that refers to five prominent mega-cap technology companies, including Meta (formerly Facebook), Amazon, Apple, Netflix, and Alphabet (formerly Google). What are the FAANG Stocks?
Why is this group of stocks a bellwether for the broader tech sector?
The FAANG stocks are an elite group of technology stocks that combine for a market cap of nearly five trillion dollars (as of July 2022). The individual companies that make up the FAANG stocks are Meta Platforms (NASDAQ: FB), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Netflix (NASDAQ: NFLX) and Google/Alphabet (NASDAQ: GOOGL).
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.
In this article, you’ll learn what the FAANG Stocks are, why they are newsworthy, and 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 and How Did They Get Their Name?
FAANG is an acronym for five individual companies: Meta Platforms (formerly 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 $5 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 was first made famous by stock analyst Jim Cramer. At the time, Apple was not included. Since then Apple has been added as the fifth company that make up the FAANG stocks.
What Makes the FAANG Stocks Newsworthy?
FAANG stocks make up approximately 1% of the S&P 500 Index – a broad representation of the stock market. As of July 2022, four of the FAANG stocks ranked in the top 10 of the index by market capitalization (Alphabet’s Google has two publicly traded share classes accounting for the third and fourth rankings). Only Netflix was not in the top 10, but it had been as recently as 2021.
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 device. 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.
Are FAANG Stocks a Good Investment?
This is the question that seems to get asked every year. The question is being raised even since strong price movement in these stocks has ripple effects on the entire market.
For example, all the FAANG stocks did well for different reasons at the onset of the Covid-19 pandemic in 2020. However, by the end of 2021, each of these stocks came under pressure sparking a sell-off in the entire tech sector followed by the broader market.
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. Meta Platforms, and to a lesser extent Google, have faced questions about user privacy. Netflix is facing challenges from many companies who are making major investments into streaming content. And some are questioning if the company’s business model will keep it as a part of this group of stocks.
Even Amazon is starting to face calls for regulation as part of a backlash from consumer advocacy groups. These groups 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 all-time highs. 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.
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. However, growth comes at a price for individual investors. As of July 2022, the stock prices for the FAANG stocks were as follows:
- Meta Platforms (FB)- $196.64
- Amazon (AMZM) - $109.22
- Apple (AAPL) - $145.86
- Netflix (NFLX) - $174.45
- Google/Alphabet (GOOGL) - $2,280.41
That means for an investor to purchase a single share in each of these stocks as of July 2022 would cost $2906.58. That’s down from the $3,561.58 they cost just three years ago. That is mostly due to Apple and Amazon splitting their stocks in 2021 and 2022 respectively.
Still, 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). And many trading apps allow investors to purchase fractional shares.
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 (Meta Platforms (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.