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Thursday, December 3, 2020

What You Should Know About FAANG Stocks

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Prominent technology companies have captured the attention of investors and Wall Street traders since the early days of personal computing. Even though Apple and other computer manufacturers had already placed their products in homes around the world during the mid-1970s, investors waited until the IBM PC hit the market in 1981 to really pay attention to tech companies.

Meet the American Tech Giants

These days, not a day goes by without financial news outlet reporting on the so-called FAANG phenomenon, which is an acronym comprised of Facebook, Amazon, Apple, Netflix, and Google. FAANG refers to shares of these American giants, and the reason they get so much news coverage is because of their Wall Street performance over the last few years, which has been absolutely remarkable. These companies are not only leaders of their respective industry sectors but also enjoy considerable market capitalization.

All FAANG stocks are part of the S&P 500; in fact, the meteoric rise of this benchmark index before the coronavirus pandemic owes a lot to this quintet of tech giants, and there is no getting around the fact that the collective value of these companies is a little over 20% of the S&P 500. Some analysts argue that the popularity and the catchy FAANG acronym are reason alone for investors to latch on to these companies, and there is a fair amount of truth to this assessment, but their market dominance is undeniable.

How Investors Should Approach Tech Stocks

As a compound interest investor, should you pay any attention to FAANG? If you take into account reinvested dividends, the 350% capital gains of FAANG over the last five years would probably make you think about adding them to your portfolio, but what about the companies themselves? When you set aside innovation and operations, how do these tech giants manage their finances and huge revenues?

The money management practiced by all of the FAANG entities will likely be in line with the philosophy of many compound interest investors.

It turns out that the money management practiced by all of the FAANG entities will likely be in line with the philosophy of many compound interest investors. The enormous cash flow that these companies enjoy is often reinvested into the operations that generated those nice revenues in the first place. Amazon, for example, is a firm believer in reinvesting operating cash into the Amazon Web Services division, which these days stands as the largest provider of cloud computing services in the world. Google is doing the same as Amazon, and this creates an active climate of competition because these two companies know that Microsoft is gradually expanding its cloud computing presence.

In the end, the fact that FAANG companies believe in the power of reinvesting for the benefit of their shareholders should be reason enough for fans of compound interest investing to consider adding them to their portfolios.

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