FANG: who are they and should I invest?

FANG stands for Facebook, Amazon, Netflix and Google. Shares in the four tech giants have been soaring in recent years, so are they now overpriced or are they set to go higher still?

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
FANG

What goes up must…continue to go up? The continuing stellar performance of the so-called FANG stocks – Facebook, Amazon, Netflix and Google (listed as holding company Alphabet) – presents investors with a conundrum. Will these businesses continue to sweep all before them, driving their valuation ever higher, or will they turn out to have been overbought in the herd mentality that so often grips markets? The tech titans have led the entire market higher for some time. In the 12 months to 21 July, Facebook was up 36%, Amazon 38%, Alphabet 32%, and Netflix 120%, while two more giants, Microsoft and Apple, were up 32% and 51%, respectively. They’re all listed on the Nasdaq exchange in New York.

Some commentators regularly predict that a repeat of the 2000 dotcom boom and bust will engulf the seemingly unstoppable FANG or FAAMG (an alternative grouping including Apple and Microsoft but excluding the smaller Netflix) stocks. Howard Gold’s MarketWatch column, for instance, sees parallels in the dotcom bust of 2000 on the basis that “the biggest winners of the dotcom era were mainstream technology companies making gobs of money” – just like today’s winners. “Still, that didn’t save them from the terrible rout that followed…even big earnings growth doesn't inoculate high-flying stocks against precipitate collapses.” Gold concludes: “Investors should be extremely wary of throwing money at these shares in the hope that they will keep growing right to the sky.”

Still, there’s plenty of fundamental backing for the growth of these stocks as the technology market globally continues to grow strongly. The size of the ‘public cloud market – the demand for remote storage – is predicted to grow annually at 17%, reaching $390 billion by 2020. This has created a ‘veritable gold rush, with each of the major players jockeying for position in technology’s most prominent frontier’, according to analysis by Motley Fool. Google and Facebook are both putting more emphasis on in-house cloud offerings, stepping up the competition with Amazon Web Services, Microsoft’s Azure, and Apple’s iCloud. The major cloud players have left smaller rivals behind, and are well placed in what are rapidly growing markets. “If they continue to sustain their competitive advantage over time, we can see FANG and its other aliases for what it really is: not a fad or a bubble, but a dominant force for years to come,” says Motley Fool.

Here’s our run-down of the FANG stocks:

Facebook

Positive: Users are still growing strongly, stimulating advertising demand. In its most recent quarter, revenue jumped by 45% year-on-year, profit by 71%, and monthly active users by 17%. Analysts see the Instagram app and video ads as the main drivers of future growth. Facebook generates torrents of free cash flow which it can invest back into the business.

Risks:  Revenue growth rates are set to fall as the social network site reaches the limit on the number of ads it can show in its news feed. Investors hate surprises, and any bigger-than-expected slowdown could hit the stock’s rating.

Amazon

Positive: Earnings per share have smashed watchers’ targets twice already in 2017, driven mainly by the cloud services business. The business generates most of group operating profits, compensating for the ferociously low margins in the retail empire. Earnings are expected to grow by nearly 30% annually over the next five years and to improve profitability.

Risks: Amazon likes to snap up companies which it believes will help it take over the world, like its recent move for Whole Foods. It pays handsomely, and there is always the risk that a future major acquisition will turn sour.

Netflix

Positive: Netflix has reported its first-ever consolidated profit in its international arm this year, with its mature markets offsetting investments in new territories. In its most recent quarter, it added 5.2 million members, a third higher than Wall Street estimates. Earnings per share are projected to grow by more than 75% a year for the next few years. 

Risks: Profitability has been fairly static over a decade despite a sevenfold rise in revenue. If growth targets aren’t met, the stock’s astonishing rating (70 times forward earnings) could be hit. There is mounting competition in the digital streaming space, as Amazon ramps up content spending, and Apple shows interest in original content. Netflix’s CEO, Reed Hastings, says Amazon is a “scary” competitor.

Google

Positive: YouTube and mobile searching helped drive Alphabet's revenue up 21%, ahead of expectations, and earnings in the second quarter of 2017. Revenue is also growing from the Android app store, Google-branded hardware, and cloud services. The group is a massive cash generator.

Risks: The drive to innovate has run into a regulatory wall in Europe, where regulators fined Google £2.74 billion for abuse of its monopoly position in search advertising. Cost per click – what advertisers pay - fell by more than expected in the second quarter of 2017. And the group’s side businesses are still losing a lot of money – $855 million in one quarter alone – which could become a drag on its performance.

Find out more about trading FANG or FAAMG stocks, as well as a host of others on our share dealing platform.

You can also use our ETF screener to explore technology-related exchange-traded funds.

 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Open an account now