Time to Ditch the FAANGs?

The FAANGs — the name given to five of the best performing tech stocks, Facebook, Apple, Amazon, Netflix, and Google (now called Alphabet) — have produced fantastic returns for years. However, regulatory headwinds and a reopening economy have led some analysts to sound a note of caution. Is it time to ditch the Faangs?

On a recent episode of Real Money's Real Talk, Jim Cramer and guests discussed the Faangs and asked whether they were dead or not. Of course, we should put the term "dead" in context.

As contributor Kevin Curran suggested, there were questions about whether the companies were still the market leaders in their verticals. Additionally, Chris Versace wondered if these companies were as disruptive as they once were.

Over the last decade, the FAANGs have become investor's favourites because of their consistent strong returns. In fact, they have been one of the primary reasons why the S&P 500 produced returns of almost 300% during that period. 

Why the FAANGs Could Stop Growing

However, some analysts, like Mike Bell, global market strategist at JP Morgan, believe these companies can't continue to overperform. Bell thinks that Fed tapers and rising bond yields will favour value stocks by the end of the year. He adds that these conditions traditionally help financials and small-caps.

While it is tempting to listen to contrarian investors, it seems that there is plenty of steam left in the big tech companies. To put it all in context, the FAANGs are still driving the Nasdaq 100.

Last financial year, they provided one-third of Nasdaq's return. Indeed, they strongly outperformed that particular index, with many other major indices success hinging on how many FAANGs they had.

Alphabet's Massive Q2

Alphabet's earnings in the last quarter exceeded the expectations of many. Revenues of $55.3 billion, which were up 34% year over year, have led to an 11% increase from the last quarter. 

However, with GOOGL already operating in all global markets, sectors, and industries, some investors wonder what room is left to grow?

For many, worries about the FAANGs come down to continued market dominance. However, Google's search engine has few competitors, while the iPhone holds a considerable smartphone industry segment. Additionally, Amazon and Facebook show little sign of slowing down.

Potential Areas of Growth

Considering these companies' appetite for innovation, the growth areas for the companies could come from unexpected places. Google CEO Sundar Pichai has identified Google Cloud as a huge avenue of growth, for example.

Conclusion

The FAANGs strong growth over the last decade has led to market dominance. However, some feel that the pace of returns can't continue. The Joe Biden administration has tech stocks in its regulatory crosshairs, and rising bond yields and Fed tapers could result in good conditions that support value stocks. 

However, the FAANG stocks excellent earnings and constant innovation mean that they still have a lot left in the tank.

Alpesh Patel OBE

www.campaignforamillion.com