What are the FAANG stocks and should you buy them?
When it comes to investing we love an acronym as they often group together companies which tell a similar narrative or point to a particular theme.
The term FANG was first coined in the US in 2009 by Jim Cramer, host of the CNBC show Mad Money. FANG represents the most popular and best performing tech stocks in the market that have generated spectacular returns for their investors.
The four stocks are Facebook, Amazon, Netflix and Google. The acronym has more recently been widened to include Apple, which at the beginning of August became the first listed company to exceed a $1trn valuation.
The returns investors have seen in these stocks has been impressive, driven by a combination of factors. First and most importantly is the growth of each of the businesses which has far outstripped the growth of most other large businesses. The figures are impressive; Amazon recently passed 100 million subscribers to its Prime service, while Netflix took on over 7 million new subscribers in the first quarter of this year alone. What makes this growth even more impressive is that it has been achieved in a world where economic growth has been subdued. These companies have been able to create their own growth and appear immune to the economic environment. Investors love self help companies.
Barriers to entry
The use of technology has helped each stock establish itself as a market leader in its field and put up significant barriers to entry making it difficult for other companies to compete. For example if all your friends are on Facebook you are almost forced to join it if you want to network with your friends.
The benefits of using technology effectively are huge, these companies can access millions of customers at a fraction of the cost and having established themselves in one market they are looking to spread into other areas such as driverless cars, healthcare or cloud services. Unlike their predecessors these companies focus on data and use it to analyse the impact of everything they do enabling them to offer a superior service.
However, investors shouldn’t look at all the FAANGS equally, each company does something different and each company operates differently. The risks to each business are not shared equally. Facebook and Google face potentially significant regulation, while Netflix is already in competition with Amazon and will soon be joined by Disney both of which have very deep pockets. Apple appears to have seen better days of growth as demand for the iPhone has slowed, but continues to demand a premium for its products.
While it is hard to predict how far these companies can grow and where the share prices might end up it is important to remember that the return you get on your investment is often influenced by the price you pay for it. Valuations differ wildly between each company and in the short term these are often ignored by investors buying into the story.
Adrian Lowcock is head of personal investing at platform Willis Owen