Increasingly, the question being asked is: is it time to drop FAANG stocks?
Not that anyone is expecting the imminent demise of the companies that comprise this famous acronym: Facebook, Amazon, Apple, Netflix and Google. Rather that the usefulness for traders and investors of treating them as a group may be coming to an end.
So what are FAANG stocks and where did the name come from? Most attribute it to Jim Cramer, the financier-turned-commentator, on CNBC in 2013. Back then, Apple was not a member of this informal club, so it was known simply as FANG.
That said, the common thread linking the five FAANG stocks has been that they are very large businesses that would not exist at all in their present form without modern digital technology. Had developments in the computer world stopped in about 1980, for example, it would all look very different.
Facebook may be a little-known dating service or a company offering professional-looking personal or family newsletters; Amazon would be a mail-order bookseller; Apple would sell the clunky computers and mobile phones of that era; Netflix would rent out video cassettes and Google would, presumably, compete in the crowded market for printed encyclopaedias.
As it is, each of the FAANG stocks is a global brand offering services without which many of us could not imagine surviving. But beyond their status as children of the digital age, what do the FAANG stocks all have in common?
An obvious answer would be: not a great amount. Facebook is a sometimes-controversial service business, as is Google, where Apple is prized for the pleasing aesthetics of its physical products, Amazon is a retailer of both physical and digital products and Netflix supplies films and television programmes, including those it has made itself.
Facebook rides out storms – for now
Nor is there much commonality among all five FAANG companies in terms of the recent share-price performance. Facebook is quite strongly up over the past 12 months, despite continued criticism on everything from the dissemination of so-called fake news to the on-line bullying of children.
Currently, the stock stands at $182.80. A month ago, on 26 August, it traded at $180.36, and six months ago, on 26 March, Facebook shares were worth $167.78.
One year ago, on 26 September 2018, the price was down at $166.95. So, they are currently on a generally strong upward trend. It remains to be seen whether this can be continued in light of rumours that the US Department of Justice is launching a probe into whether Facebook is engaging in monopolistic behaviour. This comes on top of three other investigations, launched respectively by the Federal Trade Commission and the attorneys general of two states.
Amazon, by contrast, has seen its shares drift lower during the past 12 months, despite a generally positive public image. Currently they trade at $1,768.33, and a month ago, on 26 August, they changed hands at $1,768.87.
Six months ago, on 26 March, they were worth $1,783.76 and 12 months ago, on 26 September 2018, they traded at $1,874.85.
Among the factors affecting Amazon’s stock was political criticism of the company on various grounds, including the taxes and wages it pays.
Also lower on the year was Netflix, currently trading at $264.75, down from $294.98 a month ago on 26 August and $359.97 six months ago, on 26 March. A year ago, on 26 September 2018, the shares were worth $377.88.
Apple itself has seen its share price broadly flat during the last 12 months. Currently, it stands at $221.03, a little lower than the $206.49 at which it changed hands on 26 August but higher than the $186.79 price level six months ago, on 26 March.
Twelve months ago, Apple stock was worth $220.42. The company’s near-term prospects are thought to hinge on the success or otherwise of its 5G iPhone, due next year.
Also generally flat has been the share price of Alphabet, parent of Google. Currently trading at $1,245.94, the stock was worth $1,171.18 a month ago, on 26 August, and $1,189.84 six months ago, on 26 March.
A cautionary tale
A year ago, on 26 September 2018, it was worth $1,194.06. Concerns over a slowdown in advertising growth have acted as a drag on the price.
So, where next for the FAANGs? A perennial investor worry is that, for some or all of these businesses, the spectacular growth is in the past and they are turning into mature businesses, generating unflashy yet solid returns.
An even more alarming fear is that these disruptive FAANG businesses are going to be disrupted in their turn, by upstart firms using digital technologies in ways as unimaginable to us today as were the likes of Amazon and Google a generation ago.
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Rather than try to guess at what these disruptors may look like, perhaps those preparing to invest in FAANG would be better advised to stay focused on four shorter-term variables that could affect the profitability of the FANG companies.
The first is the extent to which FAANG businesses enjoy high barriers to entry, deterring would-be competitors and keeping profits flowing.
The second is the scope of any likely regulatory action against some or all FAANG companies.
Thirdly, continued strong economic growth is key to continued FAANG profitability. In a recession, it is likely those affected may not see streaming films or ordering music on-line as a spending priority.
Finally, watch for any change in consumer fashions. A generation ago, the devotion of trendy young things seen today to smartphones and Facebook posts was found in the music industry, with the latest hi-fi equipment being the Seventies equivalent of the new iPhone.
Today, top-notch audio systems have returned to where they started, as a niche for enthusiasts.
It is a cautionary tale for those investing in FAANG. Something new always comes along. The only questions are what and when.