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13 October 2020

The Notorious Rise of FAANG+

The S&P 500 recently broke all-time highs, even beyond the highs of pre-COVID, but some investors remain mystified at this situation; bearing in mind that the US GDP (the value of all goods and services produced by a country) fell by as much as 32.9% in the second quarter of 2020.
 
This can be explained by the fact that the economy of a country and the stock market are not fully related. The stock market in the US (S&P 500) has risen to all-time highs due to the share price performance of a select few high valued companies, particularly tech companies. With that in mind, that brings us on to the acronym FAANG+, which represents these high valued group of tech stocks. FAANG stands for: Facebook, Amazon, Apple, Netflix, and Google. The ‘+’ has been added in this article to reference other large tech stocks which have outperformed some members in the FAANG group. The ‘+’ includes Nvidia, Microsoft and Advanced Micro Devices.
 
The huge share price movements in the stocks mentioned are what has led to the S&P 500 moving beyond pre-COVID highs. Performance of these companies has been driven by the market’s desire for COVID-proof business models. People are wishing to watch movies and series due to cinema closures, wanting to surf the internet and to purchase high quality computers and devices to make working from home much easier during lockdowns. All these demands are primarily fulfilled by the FAANG+ group. Facebook provides a platform for people to interact and socialise while “in-person” interaction is limited. As more people are using Facebook, the company generates more income through companies paying Facebook to advertise to users of the platform. With Google, as people use this internet search tool, the company gathers information on the types of products and services you are looking for and sells this information to businesses so they can actively target you as a customer. Therefore, Google and Facebook have seen material increases in advertising revenues as businesses look to cut expensive marketing budgets and focus on advertising that provides value for money.
 
Amazon provides a service that the high street cannot; its product range, customer care and service, as well as fast delivery times mean consumers are using Amazon as a better alternative for shopping on the high street. At a time when health and safety restrictions are so stringent on the high street, changing rooms are closed and footfall limits leave queues of shoppers waiting in the rain; online shopping has become an appealing alternative.
 
Apple sell computers and devices with a unique software, which differentiates their products from almost all in this market. In addition to this, they also sell other technology accessories. Apple’s brand is perceived as high-quality luxury technology with a strong brand reputation, therefore, with more people working from home and experiencing the IT constraints that come with it, the demand for these products has increased significantly. Apple generates 54.68% of its revenue from the sale of the iPhone, and sales of this product have risen greatly due to the social, entertainment and work communications aspects of this device.
 
Although the demand for home entertainment was high pre-COVID it has been magnified with the closure of cinemas. Netflix is a leading streaming platform that provides access to thousands of programme series and movies from the comfort of your home. Netflix generates income by charging users a monthly fee to access, and therefore has been generating higher subscription revenues in recent months.
 
The strong performance of these mentioned companies has resulted in a V shape recovery for these stocks following the March sell-off. This has driven the valuation of the S&P 500 to 189% of US GDP.
 
The FAANG group is especially unique in terms of how low their operating costs are compared the amount of money they earn, making them an attractive investment. They can do this because their business models are centred around asset-light technology, which is cheap to run, reducing costs such as rent and wages significantly. Due to FAANG cash generation, they often are left with plenty spare, which they use to buy other fast-growing companies or develop new products and services. The spare cash also gives them a safety net to weather any unexpected events such as Coronavirus, owing to their stellar performance of late.
 
These companies are not perfect by any means; Facebook is consistently under scrutiny by Congress on matters of data protection, as well as failing to screen explicit content and false political propaganda. Facebook is also unlikely to be pleased with the new iPhone updates by Apple, which will conflict strongly with the Facebook advertising model. Facebook utilises extensive data on users to increase the specificity of advertisements, to generate more revenue, however, iPhone users will be asked again for data consent on all devices. It is expected that many users will have been oblivious to the quantity of data being collected from them, and this could reduce the amount of data Facebook has access to, which could lower how much money the company make. Despite these drawbacks, the FAANG+ group remains popular.
 
While performance amongst these companies has been unbeatable, there are rising concerns over high valuations. Due to the benefits lockdown has created for these companies, their share prices have sky-rocketed but are now valued far beyond their fair values. When people begin to return to some kind of normal, we may expect a substantial pull back in the share prices within the FAANG group, but this doesn’t detract from these company’s importance and dominance in tomorrow’s world.
 
Please note that investments and income arising from them can fall as well as rise in value. Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
The Notorious Rise of FAANG+
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