Investments

What Is FAANG Stocks?

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 7 minute read

Those who wish to make substantial profits in the stock market are familiar with the most spectacular success tales of the previous decade. Stocks of some of this century’s most recognizable firms that are developing rapidly have attracted so much attention from investors that they have been given their own category: FAANG stocks.

Can you explain what FAANG stocks are and why any sane investor would care about them? Also, do you think it’s a good time to put money into them now?

What Are FAANG Stocks?

Jim Cramer, a popular TV investor and personality, came up with the name FAANG to describe the five largest publicly traded technology companies. This is what each letter in the acronym stands for:

  • In terms of monthly active members, Facebook (FB) is second only to Google+ (GOOG) among the world’s largest social networks. Users may do everything from chat with friends and relatives to search for employment to make and trade purchases. This action has resulted in the corporation trading with a market valuation of over $1 trillion and has cemented its position as one of the top 10 largest companies in the world.
  • Apple, Inc. is a multinational corporation that designs, develops, markets, and sells consumer electronics, including the iPhone, iPad, and a plethora of other devices. The corporation has become a behemoth due to its cutting-edge technology and capacity to establish a whole ecosystem centered on its wares. The company’s market capitalization of over $2.4 billion makes it the largest in the world.
  • Amazon. Early on, Amazon was an online marketplace that sold products at low prices to attract customers. That wager certainly paid off. As of now, it ranks among the world’s most significant retail establishments. It also has a significant impact on cloud computing, AI, and the whole technology industry. The firm is one among the world’s five largest corporations, with a market worth of about $1.6 trillion.
  • Netflix. Although Netflix is smaller than the aforementioned corporations, it nevertheless ranks in the top 40 largest companies in the world. The market worth of the streaming service, which provides both original and syndicated content, has increased to above $242 billion.
  • Google. The most widely used search engine in the world is owned by Alphabet. Although Google initially focused on search and advertising, the corporation has now expanded into other areas of technology, such as autonomous vehicles and cloud storage. With a current market valuation of over $1.8 trillion, Alphabet is the fourth largest corporation in the world.

Microsoft (NASDAQ: MSFT) is sometimes considered a proxy for this category of companies, and with good reason. With a market price of over $2.2 trillion, Microsoft is second only to Apple in terms of scale among computer firms (and corporations in general) throughout the world. The addition of Microsoft has led to some individuals switching the abbreviation to “FANMAG.”

The firms share several commonalities that are worth noting. They are all hugely successful businesses with well-known brand names, and they all play a significant role in the technological landscape.

In addition, each firm on the list is considered a growth stock due to its history of consistently high rates of revenue growth, profits growth, and share price appreciation.

Although only 0.01% of the stocks in the S&P 500 are of this kind, they account for nearly 15% of the index’s total value. For this reason, little shifts in the stock prices of a few stocks can have a disproportionate effect on the performance of the major market indexes.

Why are investors so enthralled with FAANG stocks?

These stocks’ popularity can be attributed to a number of different factors. Among the most crucial are:

Name Recognition

Each of the brands represented by these stocks is a household name here in the United States. Let it sink in for a second: is there a single one of those names that you are unfamiliar with?

Investors want to put their money on things they already understand. Popular companies’ shares will always be in demand on Wall Street.

Popularity of Institutions

Smaller investors might be wise to mimic the actions of their larger counterparts. When it comes to deals, the major players know where to look. All of these companies are favorites with institutional investors and can be found in several ETFs, mutual funds, and index funds.

Exciting Historical Growth

The past results of any stock in this category are certain to impress. Stock prices have skyrocketed while these firms have also seen remarkable development in sales and profits.

Exciting Technology

The novelty of technological advancements holds a special fascination for the vast majority of people. New, potentially game-changing technologies and services generate a lot of attention from investors, who end up learning more about them than they would about, say, a standard energy firm or a consumer staples stock.

After all, the wisest choices in the stock market usually wind up being the most lucrative ones. Investors are more productive when they study the kinds of businesses and goods in which they have a genuine interest.

A bigger number of investors are interested in technology opportunities than other sectors since conducting research is more fun. It makes obvious that the FAANG grouping would be widely adopted, as it includes the most important companies in the technology industry.

Is an FAANG Stock Bubble Existing?

The issue of the century is whether or not skyrocketing FAANG stocks are in a bubble, and everyone who claims to know the answer is likely wrong. Nevertheless, it’s a really important question to ponder.

Stocks in the FAANG group have reached extremely high values as a result of the massive growth I just described. Many people believe that the FAANG stocks and the whole technology industry are currently experiencing a bubble.

When investors in a certain sector of the stock market are willing to take on more risk in order to buy shares of overpriced firms, we have a bubble in that sector. Investors’ fear of missing out (FOMO) sometimes leads them to invest blindly in hot stock markets or industries.

The price-to-earnings (P/E) ratio is one of the most popular indicators used to evaluate the value of companies. A company’s P/E ratio is calculated by dividing its current share price by its expected earnings per share for the coming year. You can tell if a stock is overpriced or underpriced compared to its competitors in the same industry by looking at its price-to-earnings ratio.

However, values across the board in the technology industry have been trending upward for some time, as is typical in a hot market. P/E ratios tend to hover around the 20-point area when the sector is developing at a reasonable rate. This means that not only are the stocks of all FAANG businesses overpriced, but so are the stocks of virtually all technology companies.

There is a case to be made that the tech industry is overvalued, but there is also a case to be made that the higher prices are justified. Stocks with a technological focus have risen in value for a while now, and for good reason. Strong consumer adoption, rising sales, and expanding revenues are all results of the widespread adoption and expanding usage of technology.

In most cases, these causes lead to a rise in stock prices. Although it may appear at first glance that the sector is experiencing a bubble, or is perhaps now experiencing a bubble, the alarm bells are not yet sounding. The sector’s profits have been growing at an impressive rate, which has contributed to the sector’s rising values.

Why Do You Need To Invest in FAANG Stocks?

Investors in general view FAANG stocks as a positive addition to a diverse portfolio. These equities are safer than those of more volatile start-up tech businesses since they represent some of the world’s largest corporations. And if the company has a solid track record of expansion, investors might expect a substantial rate of return on their money.

But not every investor should put their money in FAANG stocks. When things are good in the technology industry, they are very good; when things are terrible, they are very awful. Therefore, these stocks are appropriate for a long-term investor, but not for a retiree or someone else with a short-term investment perspective.

Investors with short time horizons or who rely on the sale of stocks to support their living needs may not have the time to recover from the drawdowns if the market for these highly volatile companies were to crash, which might be harmful to a retirement portfolio that is getting close to maturity.

Bottom Line

The equities of the four major tech giants (FAANG) present compelling potential for investors. After all, these equities’ meteoric rise over the previous five years is impossible to ignore.

You might be eager to start trading these stocks right away, but remember that thorough research is the cornerstone of any profitable trade. Before putting your money on the line, it’s a good idea to do some research on the company, even if you’re familiar with it.

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