FAANG Stocks

FAANG is an acronym for the market's five most popular and best-performing tech stocks, namely Facebook, Apple, Amazon, Netflix and Alphabet’s Google. FAANG was born out of the original acronym, FANG, which did not have Apple when CNBC’s Jim Cramer coined the term in Feb 2013. "Put money to work in the companies that represent the future," Cramer told audiences. "Put money to work in companies that are totally dominant in their markets, and put money to work in stocks that have serious momentum." Cramer's call on FANG minted profits for investors. Research firm Morningstar calculated that the original four companies, excluding Apple, in the acronym had earned 691% in profits for investors between June 2013 to August 2018.

Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOG) are the five technology giants trading publicly in the market. Investors grouped these companies into one acronym to capture the collective impact that these companies have on the markets. As of March 2019, the market capitalization of these companies was equal to $3.1 trillion.

The sizeable worth of these five tech companies is a result of prominent money managers pouring money into their stocks. Funds like Berkshire Hathaway, Soros Fund Management, Renaissance Technologies, and many others have added FAANG stocks to their portfolio as growth and momentum stocks. The five tech companies have rewarded investors with blockbuster earnings through their forays into new markets, making them among the most highly-valued in the world from a price to earnings perspective. There has been triple digit growth in their stock prices. For example, Apple's share price jumped by 246 percent between January 2013 and August 2018. In addition to the sizable worth of these five tech companies, their growth spurts have also seen the majority of the prominent money managers in the United States increase their stake in FAANG stocks for their funds.

Each of the FAANG stocks trade on the Nasdaq exchange and is included in the S&P 500 Index. Since the S&P 500 is a broad representation of the market, the movement of the market mirrors the index's movement. Together, the FAANGs make up one percent of the S&P 500. But investor enthusiasm for the stocks ensures that their impact on the markets is outsized. In August 2018, they were responsible for 38 percent of the index's gain from lows in February. The S&P market cap in total is 70 percent to 80 percent of the total U.S. stock market capitalization, and the FAANGs, by order of market cap, rank 5th, 3rd, 2nd, 31st and 8th (and 9th) on the index (As of the end of 2018). Alphabet’s Google has two classes of shares trading on the public markets, hence the 9th and 10th rank.

Those rankings mean that a collective up (or down) movement in these tech shares will lead to an increase (or decrease) in the S&P 500 index, and in turn, a rise (or fall) in the market. Clearly, one can see how the FAANG stocks greatly influence the direction of the stock markets. From 2014 to 2016, the year-end earnings generated by each of the five companies has steadily increased, save for Apple Inc.’s 14.43 percent fall in earnings from 2015 to 2016 owing to a drop in revenue – Apple’s first revenue decline in 15 years.

Concerns about a bubble in FAANG stocks first emerged in 2018, when technology stocks, which had been driving gains in the stock market, began losing steam. In November of the same year, when several FAANG stocks lost more than 20% of their valuations, they were declared to be in bear territory. By some estimates, FAANG stocks lost more than a trillion dollars from their peak valuations as a result of the steep drop in the markets in November 2018.

Attempting to explain the valuation and spectacular performance of the FAANGs in the preceding years, commentators have been likened them to tech stocks before the 2000 dotcom bust, which saw a lot of overvalued tech companies crash, sending the global markets to a downward spiral. During 2018, FAANG stocks were buffeted by various problems, from regulatory and privacy issues for Google and Facebook to investor concerns about their balance sheets. An example of the latter problem is streaming company Netflix, which has had a negative free cash flow for most of its existence.

Some analysts have pointed out the difference between the dot com bust and the current crop of tech companies, stating that there is plenty room for the current tech class to grow as areas of cloud computing, social media, e-commerce, artificial intelligence (AI), machine learning and big data are still being explored and developed. In Netflix's case, analysts say the pioneering streaming behemoth is staking out its position in the market.