It’s hard to talk about the general stock market without mentioning one or more of the FAANG stocks. The Technology giants make up a sizable portion of the S&P 500 Index. FAANG is an acronym used to describe some of the most prominent companies in the tech sector. Originally the acronym was FANG for Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) (formerly Google). In 2017, investors started including Apple (NASDAQ: AAPL) in the group, turning the acronym into FAANG.
Over the past decade, the FAANG stocks have grown faster than the overall S&P 500 or the more technology-focused NASDAQ. Take a look at these numbers as of July 2021:
Total Returns since March 1, 2009
|Stock / Index
|Total Return Since March 1, 2009
The five companies combined account for approximately 17% of the S&P 500 and about one-third of the Nasdaq 100 Index.
What Do These Companies Have in Common?
These Tech giants that make up the list of FAANG stocks are market Disruptors. Disruptive technology is an innovation that significantly alters the way that consumers, industries, or businesses operate. A disruptive technology sweeps away the systems or habits it replaces because it has attributes that are recognizably superior. Here’s How These tech companies disrupted their respective industries:
- Facebook – When Facebook CEO Mark Zuckerberg set about developing the first Facebook prototype, he intended it initially to connect only a couple of students on his campus. A little over a decade later, this social-media app has reached and connected more than 1.8 billion monthly users all over the world, transcending geographical, social, cultural and religious barriers. Today, Facebook has emerged as a tool that has brought a total difference to how people communicate, share thoughts, promote their views and opinions and even influence their respective communities.
- Amazon – Amazon has grown from a fledgling online bookseller to one of the most valuable and powerful corporations in modern history. Before Amazon’s founding on July 5, 1994, shoppers had to travel to stores to discover and buy things. Shopping used to be hard work – wandering down multiple aisles in search of a desired item, dealing with crying and nagging kids, and waiting in long checkout lines. Today, stores try to reach out to shoppers anywhere, anytime and through multiple channels and devices.
Amazon has also been a factor in the rising closures of brick-and-mortar stores that can’t keep pace with the changes in retail. Even before the pandemic, stores were closing at a phenomenal rate, with analysts predicting a coming “retail apocalypse.” Amazon benefited enormously last year as much of the U.S. went into lockdown and more consumers preferred ordering goods online rather than risking their health by going to physical stores.
Amazon’s share price has almost doubled since the lockdown began in March 2020, even as over 11,000 retail stores closed their doors.
- Netflix – is the dominant company in the on-demand media industry, with 167 million (and counting) paying subscribers around the world. By creating compelling original programming, analyzing its user data to serve subscribers better, and above all by letting people consume content in the ways they prefer, Netflix disrupted the television industry and forced cable companies to change the way they do business. Now, Netflix faces tough competition for programming and viewers from Amazon, Google, and Disney, among others. That’s the price it pays for breaking the mold for how television is made and watched.
- Alphabet (Google) – Google indexed the internet extraordinarily well without human intervention, unlike previously curated outlets such as Yahoo! or LexisNexis, and in such a way that the user did not have to know how to use the index or Boolean search methods. Google enabled free searches of words or terms, making all manner of information instantly retrievable even if you did not know where it was housed.
With Google, you could find any needle in any haystack at any time. Unlocking that data has indeed been a great equalizer: any individual can arm him or herself with relevant information in an instant. The company, founded 20 years ago, has revolutionized the way we use the internet.
- Tesla (NASDAQ: TSLA) – Though not included in the FAANG list, but a tech giant nonetheless, Tesla, Despite being younger than many of its competitors, has had a significant impact on the auto industry. Most of this disruption can be attributed to its CEO, Elon Musk, not new innovations in the electric car. Suddenly, electric cars are not only viable, but they are cool again and much more accessible.
Elon Musk is at the head of a product that’s known as a ‘disruptor’. This is a product that threatens to innovate an industry. If successful, it would force every other company to adapt or perish. That’s how big electric cars have become. With increasing concerns over the environment, from both governments and the consumer, Musk is in the right place at the right time.
Why Tech Stocks Have Huge Potential over Traditional Stocks
Technology stocks are popular investments due to their potential for growth due to the rapid development of emerging technologies. Although some technology stocks are volatile and unpredictable, it can be rewarding for investors with a long-time horizon. Technology stocks also offer diversification benefits by providing exposure to different sectors.
In addition, technology companies have historic track records of outperforming other sectors in both up and down markets; hence, their possible outperformance during periods of economic uncertainty may provide an opportunity for investors looking for risk management.
As significant players in the global economy, many technology stocks have limited downside since these industries tend to have a high demand regardless of changes in world economies or risks across borders such as Brexit or currency fluctuations. Tech stocks have good profit margins and high growth. Most of them have no long term debt. The sector is also growing rapidly.
Finally, Scalability. When it comes to technology, a company usually has to invest roughly the same efforts to offer its products to 1,000 and 100,000 users. Think about it for a second. Google.com, the greatest search engine in the world – If it is used by only 1000 people, you still have to have a fully functional product. If 100,000 people use it, generally you do not have to invest into any additional product development, you just have to have a server that can handle this capacity.
Unlike regular companies that have to actually invest efforts in the production of every single piece, tech companies are much more scalable and highly profitable.
Opportunities and Risks
Technology stocks offer investors a lot of opportunities. Those strong returns, however, do not mean the technology sector is without risks. Technology changes quickly, and one-time leaders can quickly fall behind, or even go out of business. In addition, promising emerging companies may make a huge splash, only to fade out quickly.
To make money in the financial markets, there must be price movement. Fortunately, price movement is a constant in the markets, and one key factor is how rapidly prices are moving. The speed or degree of change in prices (in either direction) is called volatility. Market prices can go up and down quickly driven by Greed aka FOMO (Fear of Missing Out) and Fear aka FUD (Fear, Uncertainty, Doubt).
The good news is that as volatility increases, the potential to make more money quickly also increases. Savvy traders can see this opportunity, take advantage of the volatility and and make huge profits from these big short term moves.
The bad news is that higher volatility also means higher risk. When volatility spikes, it may be possible to generate an above-average profit, but you also run the risk of losing a larger amount of capital in a relatively shorter period of time.
Volatility Is Your Friend
First, accept market volatility — which is relatively common — as a normal part of the process of investing and the best way to outrun inflation, said certified financial planner Brad Lineberger, president of Carlsbad, California-based Seaside Wealth Management, which manages about $165 million in assets.
“Embrace the volatility, because it’s why investors are getting paid to own stocks,” he said.
This means investors should stay calm even through extreme movements. Long-term market returns are still based on the same things: dividend yields, earnings growth and change in valuation, according to Zach Abrams, a CFP and manager of wealth management at Shaker Heights, Ohio-based Capital Advisors, which manages around $800 million in assets.
In addition, sharp moves down can also be opportunities to buy more stocks and set yourself up for future gains, according to Abrams. This is because when stocks fall from recent highs, they’re trading at a discount and will likely rebound at some point, which sets investors up for larger returns.
Continuing to put money in the market when it’s down as opposed to selling is a great way to make sure you don’t miss out on a rebound. Data shows that selling when the market goes down can take you out of the game for some of the strongest rebounds.
For example, if you missed the best 20 days in the S&P 500 over the last 20 years, your average annual return would shrink to 0.1% from the 6% you’d have earned if you’d stayed the course.
We Are Witnessing The Greatest Technological Revolution In Human History
We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before.
The First Industrial Revolution used water and steam power to mechanize production. The Second used electric power to create mass production. The Third used electronics and information technology to automate production.
Now a Fourth Industrial Revolution is building on the Third, the digital revolution that has been occurring since the middle of the last century. When compared with previous industrial revolutions, the Fourth is evolving at an exponential rather than a linear pace. Moreover, it is disrupting almost every industry in every country.
The possibilities of billions of people connected by mobile devices, with unprecedented processing power, storage capacity, and access to knowledge, are unlimited. And these possibilities will be multiplied by emerging technology breakthroughs in fields such as artificial intelligence, Robotics, the Internet of Things, Autonomous vehicles, 3-D printing, Blockchain, Augmented Reality and so much more.
Like the revolutions that preceded it, the Fourth Industrial Revolution has the potential to raise global income levels and improve the quality of life for populations around the world. This Era is characterized by a disruptive technologies that is blurring the lines between the physical, digital, and biological spheres
While we can only predict what our future will look like, we can start to see that the possibilities are seemingly endless. We are only beginning to see a small fraction of what may be to come – and Understanding Disruptive technologies and its impact on society is the first step for investors to make huge profits in the stock market in the future.