What are the FAANG stocks?
The so-called FAANG stocks — Facebook Inc. (ticker: FB), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX) and Alphabet Inc.’s (GOOG, GOOGL) Google — have an outsize effect on the stock market because of their weighting in the S&P 500. When you add Microsoft Corp. ((MSFT)) and Tesla Inc. ((TSLA)) into the mix — because they’re also huge tech-related stocks — that becomes even more true. “These seven stocks make up approximately a quarter of the total market capitalization of the S&P 500 index,” notes Robert Johnson, finance professor with Creighton University. “Whether passive investors know it or not, they have a very significant exposure to the high-flying FAANGM plus (TSLA) sector of the stock market.” But their popularity has also made for high valuations, bringing their share prices “far out of line with their profit growth,” says Steven Jon Kaplan, CEO with True Contrarian Investments. Still, many view them as solid investments, and they’ve provided a haven among equities during the pandemic-driven economic downturn.
Facebook Inc. (FB)
“FAANGs and other blue-chip stocks are better placed, not just because of fundamentals like revenue growth of these companies, but also because these aren’t subjected to meme-fueled volatility,” says Kunal Sawhney, CEO of Kalkine Group. “The best part is one cannot create quick wealth in these stocks. A broad sell-off hence does not occur.” Facebook, the first name in the acronym, has climbed markedly since its pandemic low last year. Its services have been in demand during lockdown periods, but Facebook looks ready to remain relevant once the pandemic wanes again. Still, there are reasons investors should be cautious, especially as regulatory scrutiny on the Big Tech companies heats up. “Facebook has no good answer for the ways Apple’s changes to the app store compromise their advertising model — never mind the broader issues of regulating content on the platform,” says Cory Munchbach, chief operating officer with BlueConic.
Kevin Walkush, portfolio manager with Jensen Investment Management, says the iPhone maker is one of the FAANG stocks that is a quality company with sustainable competitive advantages and the potential to provide attractive returns with less risk than the overall market over time. Apple’s “competitive advantages include innovation, network effect and switching costs,” Walkush says. “The company benefits from demand for its 5G handsets, which we view as a multiyear growth driver.” The “cult-like” demand for Apple’s innovative premium consumer products is followed by consumption of high-margin apps and subscriptions, increasing customer switching costs and effectively locking customers into Apple’s “lucrative ecosystem,” he says. While Apple’s products have a certain cache, competition from Samsung, Microsoft and others remains a factor to consider.
Amazon.com Inc. (AMZN)
Although the FAANG stocks, Microsoft and Tesla are often lumped together under the “Big Tech” label, they actually span three sectors of the S&P 500 — information technology, communication services and consumer discretionary. Amazon falls into the latter. Its online marketplace and delivery services have been in high demand during the pandemic, as has its cloud services division. The company has also been investing in the grocery business and online streaming, positioning itself for the post-pandemic days as online food delivery services and entertainment appear to be here to stay. While overvaluation seems like a risk, as with all the companies mentioned in this list, so is competition from Walmart Inc. (WMT), Costco Wholesale Corp. (COST) and Target Corp. (TGT), while consumers are also turning to specialty retailers who have ramped up their direct-to-consumer activities during the pandemic. Amazon’s cloud business also faces competition from Google, Microsoft and others.
Speaking of competition, one of the most cutthroat industries seems to be online entertainment. They don’t call them the “streaming wars” for nothing. While Netflix remains the dominant player in video streaming, a slew of competitors including HBO Max, Prime Video, Disney+, Apple TV+, Hulu and Peacock are giving it a run for its money. The Walt Disney Co.’s (DIS) deep pockets, deep bench of original content and faster-than-forecast subscriber growth present a particular test. “Netflix’s battle with Disney and other streaming services is a challenge,” Munchbach says. That said, Netflix is still holding its own, boasting more than 209 million paid subscribers in the second quarter, up from roughly 193 million in the same quarter a year prior. It is forecasting more than 212 million for the third quarter of this year.
Did you know that Google was originally called BackRub? The rebranding was one of many good business decisions its leaders have made over the years. Now with a market capitalization of about $1.9 trillion, the behemoth sprawls well beyond internet search and advertising, with ventures including social media and sales of digital media, smartphones and laptops. “Alphabet’s competitive advantages include network effect, innovation, economies of scale and scope,” Walkush says. The pandemic “served as a demand accelerant for the company’s dominant services (search and YouTube) as well as its ascending enterprise cloud service. We anticipate this demand will persist as the share of people’s time online increases at the expense of traditional media.” Meanwhile, emerging economies stand to provide Alphabet with opportunities to get new users while aggressive expansion of its enterprise cloud offerings also bolsters the company’s value proposition, he says. But there are risks with Alphabet, including antitrust lawsuits and regulatory headwinds.
Just as Alphabet expands more into hardware, Microsoft is boosting its cloud services offerings, positioning itself alongside Amazon, Alphabet, Alibaba Group Holding Ltd. ((BA)(BA)) and others. Enterprise cloud services, Microsoft’s suite of Office software products and business-focused social media site LinkedIn are among drivers that could sustain growth for years, Walkush says. “Further, we see gaming as an important driver of company growth via its Xbox franchise,” he says. But like other stocks on this list, the bigger a company gets, the harder it is for it to keep putting up the same growth numbers year after year. While there’s always the risk that disruptive technology will be developed by a competitor, there’s already stiff competition for Microsoft in the everyday areas of search, tablets, cloud computing, gaming and video conferencing.
Tesla has the highest price-to-earnings valuation here by far, trading for more than 360 times trailing-12-months earnings. The valuation question makes it ground zero for a tug of war between bulls and bears, with the bulls in the driver’s seat right now. While Johnson says all of the stocks on this list look “extremely pricey” from a value investing standpoint, with Tesla’s P/E ratio “off the charts,” Johnson is not a Tesla cheerleader. “The future of electric cars is the biggest issue going forward with auto stocks,” he says. “Given all of the attendant problems with Tesla management, its huge debt load and atmospheric valuation, I believe that a much more prudent investment is GM or Ford.” While Tesla is very highly valued, the company has turned some profitable quarters, and its battery technology positions it well in the emerging electric vehicle race.
FAANG stocks and other large tech companies dominating the market:
— Facebook Inc. (FB)
— Amazon.com Inc. (AMZN)
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Investing in FAANG Stocks: Do They Deserve the Hype? originally appeared on usnews.com
Update 08/24/21: This story was originally published at an earlier date and has been updated with new information.