FAANG Stocks

What Are FAANG Stocks?

In finance, “FAANG” is an acronym that refers to the stocks of five prominent American technology companies: Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX); and Alphabet (GOOG) (formerly known as Google). 

The term was coined by Jim Cramer, the television host of CNBC's Mad Money, in 2013, who praised these companies for being “totally dominant in their markets”. Originally, the term "FANG" was used, with Apple — the second “A” in the acronym — added in 2017.

Understanding FAANG Stocks

In addition to being widely known among consumers, the five FAANG stocks are among the largest companies in the world, with a combined market capitalization of nearly $7.1 trillion as of Aug. 19, 2020.

Their substantial growth has been buoyed recently by high-profile purchases made by large and influential investors such as Berkshire Hathaway (BRK), Soros Fund Management, and Renaissance Technologies. These are just a few of the many large investors who have added FAANG stocks to their portfolios because of their perceived strength, growth, or momentum. 

Each of the FAANG stocks trades 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. As of August 2021, the FAANGs make up about 19% of the S&P 500 — a staggering figure considering the S&P 500 is generally viewed as a proxy for the United States economy as a whole.

This large influence over the index means that volatility in the stock price of the FAANG stocks can have a substantial effect on the performance of the S&P 500 in general. In August 2018, for example, FAANG stocks were responsible for nearly 40% of the index’s gain from the lows reached in February 2018.

Example of FAANG Stocks

The extraordinary size and influence of the FAANG stocks have prompted concerns about a potential bubble in FAANG stocks. These concerns started gaining prominence in 2018, when technology stocks, which had been driving consistent gains in the stock market, began losing their former strength. In November 2018, several FAANG stocks lost more than 20% of their valuations and 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. Although their valuations have since recovered, the level of volatility sometimes shown by FAANG stocks — and the influence these stocks can have on the market overall — is a source of concern for some investors.

On the other hand, those who believe in the fundamental strength of the FAANG stocks have abundant evidence for this claim. For example, Facebook is the world’s largest social network with approximately 2.8 billion users. In its 2020 annual report, Facebook posted revenues of $85 billion and net income of $29 billion.

Amazon, meanwhile, has become a seemingly insurmountable force in business-to-consumer (B2C) e-commerce. With over 120 million products for sale, it has over 300 million active customers in the United States, of whom more than half pay for monthly Amazon Prime memberships. With 2020 TTM revenues of $386 billion and a net income of $21 billion, it is not hard to understand why investors believe Amazon’s vast market capitalization is justified.

Overall, it is through strong financial performance such as this that the FAANG stocks have prospered recently. Over the past five years, for instance, Facebook and Amazon have seen stock-price increases of 185% and 500%, respectively. For their part, Apple and Alphabet saw price increases of about 175% over that same timeframe, whereas Netflix saw its value rise by nearly 450%.

What Makes FAANG Stocks So Popular?

The five stocks that make up the “FAANG” acronym — Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOG) — are all well-known brands among consumers. But they are also famous for their remarkable growth in recent years, with market capitalizations ranging from $240 billion (in the case of Netflix) to $2.4 trillion (in the case of Apple), as of August 2021. From an investment perspective, these five stocks are generally praised for their stellar historical track records and clear leadership positions within their industries.

Are FAANG Stocks Overvalued?

Investors disagree about whether the FAANG stocks are overvalued. Their proponents will argue that their valuations are justified based on their fundamental strength as businesses. But critics argue that, even with impressive business performance, the FAANG stocks’ prices have become so expensive that it may be difficult to realize attractive long-term profits from investing in them. Ultimately, this “debate” between investors is best captured by the buying and selling patterns in the FAANG stocks themselves.

Are FAANG Stocks Hard to Acquire?

No. The FAANG stocks are all easy to acquire, in the sense that they are publicly traded companies with substantial daily trading volumes. They are also routinely included in popular exchange-traded funds (ETFs). However, investors who believe that the FAANG stocks may be overvalued would argue that they are difficult to acquire at an economical price. These investors may be tempted to delay purchasing FAANG stocks, waiting for their valuations to decline.