What are FAANG Stocks? And Why You Should Invest In Them

The FAANG stocks, listed below, are simply five of the best companies that have ever existed. Mostly from the tech sector, they’ve shown shareholders love over the years with massive returns on the stock market, combined with growing earnings—and a few even pay dividends!

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  • In fact, at times, the FAANG stocks have been the sole driver of returns for the overall market. The other 495 names in the S&P 500 Index have simply performed that poorly compared to this small basket of companies, a high level of market concentration. They are one of the first places investors should look to both protect and grow their capital when investing in the stock market. 

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  • FAANG Stock #1: Facebook (FB)

    Facebook shares have been range-bound for a few years now, but are finally starting to break higher. 

    That comes off of privacy concerns on the network two years ago. More recently, it’s been an ad boycott from major companies, given the company’s lackluster response to limiting speech on the platform.

    Even with the recent ad boycott from major companies, we still see Facebook as a long-term winner. The company dominates the social media space in terms of time spent on site, meaning that advertisers will still continue to flock to the site, even if major names are stepping back right now. The company handily beat earnings, even with the negative news around it.

    It’s one of the dominant companies of the modern internet era, yet it’s lagged other big names that dominate as well such as Google. That gives the social media firm a solid relative valuation. Facebook’s “network effect” makes it a cornerstone of the Internet, and the company will find plenty of ways to continue monetizing its site.

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  • Unlike many established tech names, Facebook doesn’t pay a dividend yet. That policy may change in the next few years, given the company’s declining growth of new subscribers. All told, this is a company with some short-term headwinds that has some excellent reasons to belong in a long-term portfolio. Take advantage of this stock market bargain now.

    FAANG Stock #2: Apple (AAPL)

    Before Apple, there were only the FANG stocks. The company belatedly joined the party. It’s easy to see why, even though the company is now part of the Dow Jones Industrial Average as well.

    The blue chip consumer tech company, this industry-leading giant is likely to maintain its lead for years to come. The company is simply a living legend. Over the years it has innovated in personal computing, smartphone technology, and even owns the world’s highest-profit-margin music store with iTunes. 

    It’s no wonder you can find shares of Apple stock in just about any mutual fund or ETF. But that’s for a reason.

    So, yes, it’s a pricey company. And it carries a market capitalization of nearly $1.5 trillion right now. But this is a company that’s likely going to continue being a long-term winner. 

    Despite having to pay for a lot of costly manufacturing for its physical goods, the company has a 21 percent profit margin and operating margins of 24 percent. That’s closer to a purely-tech play like a software company than a firm best known for making smartphones.

    Earnings growth has slowed out in recent quarters, putting it ahead of some of the dire headlines about the economy right now. But that’s what makes it a time to buy—a fact many traders have already recognized, and why shares still trade near all-time highs.

    No matter what happens in the economy, consumers will still download music from the store. And they’ll still need to upgrade their iPhones on a regular basis. And with newer technologies and services in television and screening coming along, there’s still a lot of profit opportunity ahead. The stock returns here will likely continue to beat the market.

    Shares even offer a dividend payment, albeit a low one just under 1 percent. But given how much the shares move in a given year, and the company’s already strong record of dividend growth and share buybacks, today’s investors are likely to continue to see excellent returns buying and holding this long-term play.

    FAANG Stock #3: Amazon (AMZN)

    The online retail giant has already benefitted from many stay-at-home trends this year, and we see those trends continuing in the coming year. This top tech stock seems to perform well no matter what consumer spending trends occur. 

    But that’s only a fraction of Amazon’s business. Its cloud services division, known as Amazon Web Services or AWS, is a huge driver of revenues for the company, helping improve its net income and bringing the company to a (mostly) steady level of profitability after years of inconsistent profitability following a strategy of “getting big quickly.”

    Whatever trends occur in technology in the future, Amazon already stands as a play on those trends, and with a consumer bent second only to Apple. This is an incredibly well-positioned company to succeed, even as it has made its own path over the years, shunning the traditional Wall Street model of showing steady and growing revenues.

    That’s why shares, while pricey and at all-time highs, are still a worthwhile buy here. It’s very likely that the company’s best growth days are still ahead.

    FAANG Stock #4: Netflix (NFLX)

    One of the best performing stocks of the past decade, Netflix shares show no signs of slowing down. That’s in spite of rising competition from other streaming services. Even with the rise of so many competitors in the past few years, Netflix has over 167 million paid subscribers in 190 different countries.

    The company has shown revenue growth of 28 percent in the past year, and earnings growth of 106 percent in the past year. It’s no wonder shares are trading at all-time highs and are up nearly 30 percent in the past year.

    In the past, the company used large debt offerings to fund its original programming and other growth needs. Now that the growth is there, the company’s balance sheet has improved, with $5 billion in cash and $15 billion in debt. Against the company’s market capitalization of over $220 billion, the company appears to have successfully grown out of its debt problems from the past. This is yet another growth name with some powerful value trends behind it.

    FAANG Stock #5: Google (GOOG)

    Technically, it’s Google parent Alphabet that’s the real name of the company now, but that would interfere with the memorable FAANG acronym.

    The parent company of search engine tech giant Google has been a relative underperformer among the big tech companies. While it’s impossible to know when that will change, it does mean Google is a relative value in the tech space right now.

    Google dominates online advertising revenue, having both a competitive advantage and an absolute advantage. The company’s performance and brand advertising services are second to none. But it also offers cloud computing and hardware services, all of which support a growing integration of digital goods and services.

    Google is still sporting double-digit growth with a 13.3 percent increase in revenues in the past year to over $166 billion. It’s also impressive that the company has nearly $100 billion in net cash against its $1 trillion market cap, making for a relatively strong balance sheet play as well. That means shares are a reasonable bargain trading at under 30 times forward earnings.

    FAQ’s

    Are FAANG Companies a Good Investment?

    Historically, the FAANG stocks have been great investments, as they’ve far outperformed the broad market in the past five- and ten-year periods. While past performance is no indication of future performance, these individual technology stocks are still posting strong growth rates that should allow them to continue their growth for years to come. 

    That means today’s investors should see higher earnings, higher cash flow, and increased dividends from the stocks that currently pay dividends as well.

    Just remember, as the tech names tend to outperform on the way up in a bull market, they also tend to show a lot of downside volatility in bear markets. 

    However, that tends to create better entry points for the next rally higher, and buying the dips in the FAANG space has historically been a good investment. There may also be a decent buying opportunity during earnings season, as one or more members of the FAANG group may have gotten ahead of itself and sees a modest selloff.

    Is there an ETF for the FAANG Stocks?

    There are dozens of ETFs that include the FAANG stocks. Because the list is only five stocks, and ETFs have diversification requirements, there’s no single ETF or mutual fund that only holds these five stocks. 

    Among the ETF universe that holds these stocks, the Invesco QQQ trust (QQQ) is an ideal holding. The QQQ tracks the Nasdaq 100 Index, so it holds every FAANG stock, and over 30 percent of its portfolio is just in these names. That’s about as concentrated as a fund can get! Only hedge funds and individual investors can get more concentrated.

    The remaining balance of the fund is likewise invested in smaller tech names on the Nasdaq Composite Index that could be added to the FAANG acronym in the future, should they start to become industry-dominating, as well as companies like Microsoft (MSFT) which didn’t make the acronym cut, even though it has similar characteristics as the FAANG names.

    How do I Invest in FAANG Stocks?

    The FAANG stocks can be bought as individual stocks, or in an ETF like the QQQ. Traditional investment advice would be to start with the fund, for its diversification. If one FAANG stock has a great year and the rest simply tread water, you’ll still get the benefit of a gain, which you might not if you try to cherry pick from the list each year.

    Another idea might be to break out a part of your portfolio strictly for the FAANG stocks, and start with an equal weighting in each of the five names, periodically rebalancing every year or so. That will allow runaway profits in one name to go into whichever name has been underperforming. An investor may also want to use technical analysis to try and take some profits off the table in some of the names rather than rebalance on a specific date.

    While a company like Amazon may be expensive with a share price over $3,100 right now, today’s apps and online brokerage accounts allow investors to buy fractions of shares, making this strategy possible as well.

    What are FAANG Stocks?

    The FAANG stocks are Facebook, Apple, Amazon, Netflix, and Google. 

    The FAANG stocks are industry-dominating names in the sectors that they’re in, and have been massive market performers for some time, and will likely continue to do so for the foreseeable future.

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