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.
- FAANG is an acronym referring to the stocks of the five most popular and best-performing American technology companies: Facebook, Amazon, Apple, Netflix and Alphabet (formerly known as Google).
- 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 over $4.1 trillion as of January 2020.
- Some have raised concerns that the FAANG stocks may be in the midst of a bubble, whereas others argue that their growth is justified by the stellar financial and operational performance they have shown in recent years.
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 over $4.1 trillion as of January 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. Together, the FAANGs make up about 15% 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 nearly 2.5 billion users. In its trailing twelve months (TTM) as of January 2020, it posted revenues of $65 billion and net income of $18 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 150 million active customers in the United States, of whom more than half pay for monthly Amazon Prime memberships. With TTM revenues of $265 billion and a net income of $11 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%.