Regardless of your experience with investing, you may have heard of a group of stocks nicknamed the ‘FAANGs’. It wouldn’t be a surprise because the financial media loves to talk about them. They’re five of the largest, most famous companies in the world, and their performance over the last five years has been remarkable.
So, who are the FAANGs?
The F in FAANG stands for Facebook
Market value: $663 billion
5-year stock return: +136.8%
Industry position: 1
Facebook is the largest social media platform in the world, and the tech giant also owns Instagram, and two of the world’s most popular messaging apps, WhatsApp and Facebook Messenger.
The first A in FAANG stands for Amazon
Market value: $1,460 billion
5-year stock return: +455.5%
Industry position: 1
Amazon is the largest business-to-consumer e-commerce company in the world. Its Prime membership program has over 150 million global subscribers who have proven extremely loyal to the company’s online marketplace1. While e-commerce accounts for the bulk of its revenue, Amazon has found profit engines in cloud computing services and advertising.
The second A in FAANG stands for Apple
Market value: $1,575 billion
5-year stock return: +192.5%
Industry position: 1
Apple is one of the biggest smartphone manufacturers in the world. Device sales account for most of Apple’s revenue, but in recent years the company also started focusing on higher-margin subscription services, including streaming music and video, gaming, news, and cloud storage.
The N in FAANG stands for Netflix
Market value: $209 billion
5-year stock return: +333.6%
Industry position: 1
Netflix is one of the first internet-born media companies. In 2007, it started to shift from a DVD-by-mail service to on-demand streaming, and in 2012 it started investing in its own original content for the streaming service. Today, Netflix is one of the biggest buyers of film and television productions in the world, and it serves over 160 million global subscribers2.
The G in FAANG stands for Google
Market value: $1,022 billion
5-year stock return: +140.8%
Industry position: 1
Everybody knows Google – chances are you may have used it to find this blog! While Google started as an internet search company, it’s continued to acquire and develop consumer-facing products, nine of which boast over 1 billion users each3. Google also encompasses a growing cloud computing business and a relatively small hardware business.
So, together Facebook, Amazon, Apple, Netflix, and Google make up the FAANGs.
Why does everyone talk about the FAANGs so much?
The FAANGs are market leaders in their industry, and largely appear to be untouchable. Apart from Netflix who has stiffer competition compared to the other FAANGs, including online streaming services from FAANG counterparts, Amazon and Apple. And let’s not forget about Disney who’s recently launched their streaming service. Anyway, the FAANGs are so popular because their dominance and popularity has meant that the stock prices of these companies have done incredibly well.
How have the FAANGs performed versus the S&P 500?
The FAANGs are US based tech companies who are also on the S&P 500 stock market, where the stocks of 500 large US companies are being traded. Over the last five years, the S&P 500 has generated a +71% total return, on an annual basis +11% (including reinvested dividends) which is a strong return, when the historical average across the last 20 years is closer to 6% (including reinvested dividends). However, investors who bought the FAANGs instead of the S&P 500 as a whole would’ve seen returns closer to +357% over 5 years, and on an annual basis +35.5%. Looking back, an investor with an equal amount in each of the FAANG stocks would’ve done very well4.
The FAANGs are worth a lot, like a lot a lot
The fact that three of the FAANGs are worth tens, if not hundreds, of billions of dollars, and two have surpassed the one trillion mark signifies their dominance. But those numbers alone are pretty useless, it’s better to compare their value to other publicly traded companies. If you add each company’s value, the FAANGs are worth just shy of $5 trillion - that is a lot of money! Now take the FTSE 100, where the UK’s top 100 companies are listed. If you were to add up the value of each company in this index, you’d find they’re ‘only’ worth about $2.2 trillion5. Take that in a second. Five US companies, the FAANGS, are worth more than twice as much as the best and biggest 100 companies in the UK. Actually, Apple and Amazon on their own are worth over trillion dollars, these two companies together are worth more than the entire FTSE 100. So, how big are the FAANGs? Pretty big.
The S&P 500 is turning into a FAANGs+ stock market
Being such large companies with really strong share price performance has been very favourable to the S&P 500 stock market. Although there are an additional 495 companies that form the S&P 500, those five stocks are worth 22% of the total market. If we assumed all 500 stocks were equally weighted that should be a 0.20% allocation to each of the 500 companies. Instead, 16% of the entire market is reliant on five, high growth, tech stocks6. There is less concern when these behemoths are going up in value. But what happens if the tide turns? A typical saying in the investment industry is that when the US stock market sneezes, the world catches a cold. Suggesting the US market drives sentiment and direction of other global markets. If that is correct, and the fortunes of the US market are largely driven by the FAANGs, you could argue that if the FAANGs sneeze, the world markets catch a cold.
Why does it matter that the FAANGs are so dominant?
To have the US market, and arguably global markets, so reliant on five companies comes with an extreme level of risk by concentrating on these companies. Who wants the fortune of their investment plan to be tied to five companies? A very brave person! Yes, they have delivered superior performance over the last five years, which is great. But their operational and competitive edge has led to stellar stock prices that are arguably priced for perfection. Should they stumble, share prices that are priced for perfection are often met with a steep decline, and if these stocks decline, it is likely to turn sentiment negative and everything may decline as a response. So as an investor, it’s important to consider diversifying your portfolio. Investing exclusively in the FAANGs may be very tempting, but if you want to avoid extreme bumps, it may be wise to invest in a variety of companies.
Do I own the FAANGs in my Wealthify plan?
If you own an original investment plan, then the answer is yes! Our US and global share funds both own shares in the FAANG stocks as they are in the S&P 500. But remember, although the FAANG stocks tend to generate strong returns, nothing’s guaranteed in the stock market, and as an investor, it’s important to spread your money across multiple companies, investment types, and regions, that way you can mitigate your investment risk.
To wrap up
The FAANGs form a large part of US and global stock markets. They’re hugely successful, market leaders. Facebook, Amazon, Apple, Netflix, and Google – the kings and queens of the stock market. The thought-provoking question is who will replace them in the future?
References:
1: https://www.businessinsider.com/amazon-surpasses-150-million-prime-subscribers-2020-2?r=US&IR=T
3: https://www.techspot.com/news/81119-photos-becomes-ninth-google-product-pass-one-billion.html
4: Data from Bloomberg
5: Data from Bloomberg
6: Data from Bloomberg
Past performance is not a reliable indicator of future results.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
