They constitute 15% of the entire S&P 500. They have a combined market cap of over 4 trillion US dollars which is more than the GDP of most countries including India. In the last decade, more than 16% rise in all US equities market cap (more than 7500 stocks) has come from these five companies. They might be US companies but they form a huge part of life for a bulk of the world population.
They are Facebook, Apple, Amazon, Netflix & Google (“FAANG”) and unless you have been living under a rock, it is likely that these 5 technology companies play an active role in your life. The term “FANG” was first coined by Jim Cramer, host of “Mad Money” on CNBC in 2012 and didn’t include Apple, but given Apple’s exponential growth it was perhaps inevitable that it would be included sooner rather than later
This begs the question. How did these companies become so big and maybe more importantly why? Let’s look at their individual journeys.
In this article
Facebook is the youngest of the 5 big tech companies and was incorporated in 2004. It launched its IPO in 2012. It was valued at 100 billion dollars in 2012 and rose to 500 billion dollars in 2018.
In 2019 it reported revenue of about 70.7 billion dollars, up from 1.97 billion dollars in 2010. This constitutes a compounded annual revenue growth rate of 43%. The social media giant generates revenue primarily through online advertisements and has popular subsidiaries including WhatsApp and Instagram.
In the last 8 years, investors in Facebook have seen their capital rise at a compounded annual growth rate of 28.10%. The rise in the last ten years has also been pretty smooth and uninterrupted.
At the beginning of 2010, Facebook was still a private business, though venture capitalists were clearly excited about its prospects pricing it at roughly 14 billion dollars in January 2010, primarily on the basis of its number of users. Facebook today has close to 2.7 billion users, many of whom spend large portions of each day in its ecosystem. To put this into context, the world population is estimated to be 7.8 billion.
Amazon was incorporated in 1994 and launched its IPO in 1997. Its revenue grew from just over 34.2 billion dollars in 2010 to 260.5 billion in 2019 which constitutes a compounded annual growth rate of 25.3%.
The stock price has risen from 177.58 dollars in 2010 to 3,104 dollars as of December 2020 which means Amazon investors have earned a compounded annual return of 33.26%. During the same time, the nifty 50 has provided a return of just above 8%. Amazon gained a lot of attention from investors as an online retail business in the early 2000s when the markets in the US were in a bubble.
The business almost failed when the bubble burst in 2001 but survived and prospered in the next decade. By 2010 Amazon was already an established online retailer and investors were expecting the business to mature. But this was the time when Amazon diversified and reinvented itself as a disruptive platform venturing into every business it sensed weakness in. Today amazon is into wallets & payments, streaming services, food delivery, video games, music, audiobooks, cloud storage and much more.
Apple is by far the oldest of the 5 companies. Founded in 1976, it launched its IPO in 1980. During the 1980s Apple ignited the shift from mainframe computers to personal computers first with Apple computers and later with its Macs.
The company went through a tough phase in the 90s after the departure of Steve Jobs, its visionary co-founder. But the come-back of Steve Jobs during 2000-10 turned the company’s fortunes with revenue growing from 7.9 billion dollars to 65.2 billion dollars This further rose to 260 billion dollars in 2019 under Tim Cook as CEO, after the untimely demise of Steve Jobs.
Primarily, Apple is a smartphone player generating almost 62% of its revenue from the iPhone but lately has ventured into a new range of products and services like Apple TV, Apple Pay and Apple Music. In the past decade, the stock price has grown 10 times, meaning, investors have earned a compounded annual return of 26.82% . Apple is valued at more than 2 trillion dollars today making it the biggest company in the world by market capitalization.
At the beginning of 2010, it is unlikely that anyone could have predicted the rise of Netflix. At the time its market capitalization was less than 4 billion dollars and its business model of renting content and signing up subscribers was already under strain.
The company started as a video rental service, mailing DVDs to its customers. Since then it had to change its business model multiple times from a video rental company to a content rental and finally to a content provider.
Today Netflix has over 182 million subscribers all over the world. Its revenue has increased from 2.1 billion dollars in 2010 to 20.1 billion dollars in 2019 while the stock price has increased almost 20 times giving a compounded annual return of 34.58%. Out of the 5, Netflix has generated the highest return for its investors which is understandable considering the low base it started from.
Like Facebook, Google has had uninterrupted growth since it was founded in 1998 and launched its IPO in 2004. The journey from 19 million dollars in 2000 to 29 billion in 2010 and finally to 161.9 billion dollars in 2019 has been met with almost no resistance.
By 2010, Google was already the company to be followed with a market capitalization of 160 billion dollars and has moved from strength to strength since then with a market capitalization of more than 1 trillion dollars today.
Google LLC is the largest subsidiary of its parent company, Alphabet Inc., which owns two publicly traded share classes – Class A shares and Class C shares. Class A shares offer holders voting rights and are traded under the ticker “GOOGL”. Whereas, Class C shares come without voting rights and are traded under the ticker symbol “GOOG”.
Google offers an extensive range of facilities, including its own search engine, office software (like Google docs and sheets), email services and more. Moreover, the company has also started manufacturing speakers, laptops and smartphones in the past few years. However, the bulk of the revenue and profits still come from the online advertising business.
The Secret Sauce to Success
Needless to say, these companies have been successful beyond anyone’s wildest dreams. It requires significant competitive advantages to sustain success and generate excess returns for investors over such a long period of time. Let’s explore some of them.
- They have a platform of users/subscribers who are sticky: FAANG stocks have a huge user base who spend large portions of each day in their ecosystem. These users also tend to stick and not move away.
- Big Data: What sets these companies apart is that they have a lot of data about their users and their likes/dislikes. They use this data to customize their products and services accordingly. The most important part is that the data that they collect is proprietary hence becomes a sustainable competitive advantage
- Network effects: If you use Facebook and people you know use Facebook then that makes Facebook much more enjoyable than if you were using it alone. The same goes for Google & Netflix as well. Network effect is a phenomenon whereby a product or service gains additional value as more people use it. It is one of the most sought after competitive advantages among technology companies.
If an investor had bought $1,000 worth of stocks in each of the FAANG companies in 2010 (2012 in the case of Facebook because that’s when the IPO was launched), then his/her investment would be worth $61,142 today. The same investment would be only worth $14,975 if it had been invested in an S&P index fund and worth $11,358 in the nifty 50.
Given below is a tabular representation of how much $1,000 invested in each of the FAANG companies would be worth in 2020.
|Company||Ticker Symbol||Compounded Annual Return||Approximate Value of investment in 2020|
|Facebook ($1,000 invested)||FB||28.1%||$7,249|
|Amazon ($1,000 invested)||AMZN||33.26%||$17,660|
|Apple ($1,000 invested)||AAPL||26.82%||$10,763|
|Netflix ($1,000 invested)||NFLX||34.58%||$19,482|
|Alphabet ($1,000 invested)||GOOG||19.6%||$5,987|
It’s important to note, however, that past performance is not indicative of future performance and that as an investor is always wise to weigh the pros and cons before making a decision to invest in FAANG stocks or any other stock for that matter.
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