What Are FAANG Stocks and Should You Buy Them?

If you are a seasoned investor or even new to the world of investing, we are sure you must have heard of the term FAANG and the buzz around it. It is hard for most investors to talk about the stock market without mentioning one or more of the FAANG stocks.

So, what are these FAANG stocks, and why do they play at least a small role in every investor's portfolio? Here in this article, we will answer all these questions and also help you decide whether you should invest in these stocks or not.

Each of these FAANG stocks trade on the NASDAQ and comprise about 15% of the S&P 500 Index. That is an astounding figure as the S&P 500 Index is a broad representation of the US market and pretty much represents the entire US economy as a whole with the movement of the market mirroring the index's movement.

With these five stocks being worth around 22% of the index, it also means that volatility in the stock price of the FAANG stocks has a substantial effect on the performance of the S&P 500 index in general.

Moreover, all the companies comprising the FAANG stocks are known for their dominance in their respective industries along with having sizable customer bases. Three of these are worth tens of billions of dollars, and two of them have surpassed 1 trillion dollars, meeting investor’s high expectations and delivering above-average sales and profit growth.

Their strong second-quarter results continue to signify their undeniable dominance and impact in the market and growth of the economy, making them a popular choice for a wide range of investors.

Facebook is one of the largest social media companies in the world with 3 billion people using its services every month. Today it is an integral part of daily online life for billions worldwide. The Facebook stock price has seen an increase led by its average revenue growth of 44% in the past five years, and its earnings growth of 42.5% also indicates healthy margins.

Among the six most popular social media platforms in the world, it owns two of them – WhatsApp and Instagram along with itself being included in the list. Its daily active users are increasing 12% year over year, and the Facebook stock price has recently seen an increase of 185%.

Amazon is the largest B2B e-commerce company in the world with its prime membership program having over 150 million subscribers globally. The company holds a monumental presence in the US stock market and is one of the most impressive large-cap earnings growth stocks in the market.

While e-commerce accounts for most of its revenue, it also derives a significant chunk of its revenue from cloud computing and advertising services. Q2 of this fiscal year saw a 40% rise year over year in its net sales pushed by the increased online shopping demands amid the pandemic.

Amazon’s stock price has recently increased by nearly 500%, and investing in this stock can give you exposure to one of the highest-quality growth companies in the world. Moreover, Amazon boasts of a superior management team who are long-term oriented and focus beyond quarterly results.

It is one of the most valuable publicly traded companies in the world with a market capitalization of around $1.9 trillion. It is one of the biggest smartphone manufacturers globally, and its device sales account for most of its revenue.

With approximately 185.2 million smartphones getting shipped in AY 2020-21 and revenue of $260.2 billion, it continues to grow and dominate the tech industry.

Apple stock price has increased by about 175% in recent times, and with its focus shifting to higher-margin subscription services, games, news and cloud storage, its overall revenue is expected to climb further. You can read more about the five reasons to buy Apple stock – here.

It is the world's premier streaming video service and one of the biggest buyers of film and television productions in the world, serving over 160 million people worldwide. It has conquered the North American market with around 73 million paid subscribers in the US and Canada.

Netflix has seen a stupendous subscriber growth in the first half of 2020 and added more than 10.1 million new subscribers in its second-quarter earnings report.

Given how the primary revenue of such subscription-based business models is subscriber growth, the above increase in subscriber numbers is definitely a positive sign.

Netflix has also begun an aggressive international expansion entering more than 130 new countries because of which its international subscribers have also increased to around 120 million.

Alphabet is a California-based technology giant whose primary revenue comes from digital advertising. It has become the world’s most popular search engine and controls more than 87% of the US market and more than 90% of the global market share.

The search giant also continues to acquire and develop consumer-facing products, some of which enjoy over 1 billion users each. YouTube, Gmail, Google Play, Google Home smart speakers and Google Cloud are a few of its popular products that augment its dominance in the tech industry.

The Alphabet stock price has recently seen increases of about 175%, and amid new work from home norms, its revenue from Google Cloud and Google Play saw impressive growth of 43% and 25% year over year respectively.

According to many investors and analysts, FAANG companies exhibit several competitive advantages that make them stronger than their competitors and also become attractive long-term investments.

They have historically outperformed the S&P 500 index and given investors concrete reasons to believe that the FAANG make excellent investments. Most of the FAANG companies also benefit from the network-effect such as Apple, which can deploy new software and services to billions of active iPhone users and other devices to create a continual cycle that ensures that the company continues to prosper. Similarly, Amazon’s Prime services attract millions of shoppers to its marketplace every-day, creating a lock-in effect.

According to the analysts, these competitive advantages make the FAANG stocks great potential investments. Moreover, all of these five companies have intangible assets that enable them to produce way higher levels of profitability than their competitors.

However, they believe that even if you choose to invest in the FAANG stocks for the long-term, you need to invest in the right ones. That is because, although these stocks get grouped together, some of them might be better than the others.

For example, a large group of investors believe that Netflix is a fairly recession-proof stock compared to most companies because it offers outstanding value relative to its price. Similarly, some other stocks in the FAANG group may be in a better position in the market and capable of surviving serious economic shocks as compared to the rest.

Therefore, even though the FAANG stocks have positive upward potential and have proven to be market leaders, it is necessary to do your own research based on your long-term financial goals, risk appetite and return expectations before investing in them.

To read more about investing in US markets, click here.