Investment Insight | Famous five
The term ‘FANG Stocks’ is widely used by market commentators and analysts. The term was coined in 2013 by Jim Cramer, host of CNBC’s ‘Mad Money’. FANG is an acronym derived from the names of four prominent American technology companies; Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOG).
Over time, this morphed into the acronym ‘FAAMG’ reflecting Apple’s rise to prominence as the most valuable company in the world by market cap and the reemergence of Microsoft under Satya Nadella. Netflix does not appear in this new grouping.
Nearly everyone has heard of these companies and probably uses their products, at least indirectly, but we ask how much is known about these businesses, how they make their money and why they are interesting investment options.
The first point to make is that the sheer size of these companies means their strength is critical to the performance and direction of the United States share market in general. The market cap of Apple at $2.49 trillion is immense. By itself, Apple comprises over 6% of the S&P 500 (the benchmark index of the United States share market). Microsoft is not far behind at 5.7%, so these two names comprise almost 12% of the S&P 500.
Looking at the top five names, Facebook, Apple, Amazon, Microsoft, and Google comprise 22% or almost a quarter of the benchmark index. Further, these same shares make up 42% of the Nasdaq, another widely-followed United States index.
The FAAMG companies have been grouped together because they share similar market features – massive market capitalisation, high growth rates, large user bases and addressable markets. Despite these similarities, the business models of these companies are quite distinct.
Apple is known for designing high specification and stylish, user-friendly consumer technologies. The iPhone – arguably their flagship product – has an estimated 47% market share in the United States and 16% worldwide, making Apple the second largest producer of smartphones behind Samsung. In 2021, the iPhone alone is expected to generate sales of US$188 billion for Apple, or $3.6 billion per week.
Facebook is the world’s foremost social networking platform. With a total user base of more than 3.0 billion people, the company can claim approximately 40% of the world’s population as users. To monetise this extraordinary user base, Facebook sells targeted ads based on users’ personal preferences and usage patterns. With such a large customer base, Facebook can attract a very large share of the global online advertising market, allowing it to currently generate over US$110 billion in revenue.
Amazon is the most diverse of the FAAMGs but is still best known for its leading business-to-consumer (B2C) e-commerce platform, which is supported by a leading-edge technology platform and logistics network. Amazon has achieved a 40% market share in United States online retail sales, giving it an incredible 7% market share of total retail sales in the United States.
However, many people may not be aware that the company now generates over half of its profits from Amazon Web Services (AWS), a subsidiary of Amazon that provides on-demand cloud-based computing to a range of users on a metered pay-as-you-go basis. AWS owns large- scale data centers and helps businesses transfer their technology platforms from locally based systems to a cloud system hosted by Amazon.
In addition, Amazon has a growing video streaming service under the Amazon Prime brand which competes directly with companies like Netflix.
Microsoft, the elder statesman of this group, reinvented itself in recent years as it recognised and fully embraced the importance of cloud-based computing. Their Azure cloud platform is now a go-to solution for many companies. In 2021 the cloud solutions business is expected to generate almost US$60 billion in revenue, and this is expected to grow at 20% per annum. By 2025, this segment is expected to generate $116 billion.
While this is the largest of Microsoft’s three business segments, the remainder are not far behind. The Productivity and Business Process segment – comprising the Office software suite, LinkedIn networking platform, and their client relationship software Microsoft Dynamics – generates US$53 billion. The personal computing segment – Windows software and operating system, digital devices and Xbox gaming services – generates US$54 billion in annual revenue.
Alphabet/Google has leveraged its position as the world’s go-to search engine and developed a leading and exceedingly profitable online advertising business which is expected to generate a staggering US$189 billion in revenue in 2021. This represents 80% of the company’s total revenue. Despite its size, Alphabet/Google is growing at 20% per annum. The other major business segment is Google Cloud. While Google Cloud represents a relatively small percentage of overall revenue, it is a massive business in its own right with revenues of US$46 billion expected in 2021.
In total, these companies have a combined revenue of US$1.3 trillion. To put this in context, this is almost six times larger than New Zealand’s gross domestic product. In this article, we have kept things relatively straightforward and have not discussed the earnings these companies generate from their immense sales. Unlike many newer high-growth technology names (such as Zoom, the online video conferencing platform) which are rapidly growing their revenue but not yet making a profit, these five mega tech companies generate large and reliable earnings. As such, they offer investors growth-type investment characteristics but, at the same time, the FAAMG companies have increasingly become more defensive ‘safe haven’ assets in recent years.
Over time, this morphed into the acronym ‘FAAMG’ reflecting Apple’s rise to prominence as the most valuable company in the world by market cap and the reemergence of Microsoft under Satya Nadella. Netflix does not appear in this new grouping.
Nearly everyone has heard of these companies and probably uses their products, at least indirectly, but we ask how much is known about these businesses, how they make their money and why they are interesting investment options.
The first point to make is that the sheer size of these companies means their strength is critical to the performance and direction of the United States share market in general. The market cap of Apple at $2.49 trillion is immense. By itself, Apple comprises over 6% of the S&P 500 (the benchmark index of the United States share market). Microsoft is not far behind at 5.7%, so these two names comprise almost 12% of the S&P 500.
Looking at the top five names, Facebook, Apple, Amazon, Microsoft, and Google comprise 22% or almost a quarter of the benchmark index. Further, these same shares make up 42% of the Nasdaq, another widely-followed United States index.
The FAAMG companies have been grouped together because they share similar market features – massive market capitalisation, high growth rates, large user bases and addressable markets. Despite these similarities, the business models of these companies are quite distinct.
Apple is known for designing high specification and stylish, user-friendly consumer technologies. The iPhone – arguably their flagship product – has an estimated 47% market share in the United States and 16% worldwide, making Apple the second largest producer of smartphones behind Samsung. In 2021, the iPhone alone is expected to generate sales of US$188 billion for Apple, or $3.6 billion per week.
Facebook is the world’s foremost social networking platform. With a total user base of more than 3.0 billion people, the company can claim approximately 40% of the world’s population as users. To monetise this extraordinary user base, Facebook sells targeted ads based on users’ personal preferences and usage patterns. With such a large customer base, Facebook can attract a very large share of the global online advertising market, allowing it to currently generate over US$110 billion in revenue.
Amazon is the most diverse of the FAAMGs but is still best known for its leading business-to-consumer (B2C) e-commerce platform, which is supported by a leading-edge technology platform and logistics network. Amazon has achieved a 40% market share in United States online retail sales, giving it an incredible 7% market share of total retail sales in the United States.
However, many people may not be aware that the company now generates over half of its profits from Amazon Web Services (AWS), a subsidiary of Amazon that provides on-demand cloud-based computing to a range of users on a metered pay-as-you-go basis. AWS owns large- scale data centers and helps businesses transfer their technology platforms from locally based systems to a cloud system hosted by Amazon.
In addition, Amazon has a growing video streaming service under the Amazon Prime brand which competes directly with companies like Netflix.
Microsoft, the elder statesman of this group, reinvented itself in recent years as it recognised and fully embraced the importance of cloud-based computing. Their Azure cloud platform is now a go-to solution for many companies. In 2021 the cloud solutions business is expected to generate almost US$60 billion in revenue, and this is expected to grow at 20% per annum. By 2025, this segment is expected to generate $116 billion.
While this is the largest of Microsoft’s three business segments, the remainder are not far behind. The Productivity and Business Process segment – comprising the Office software suite, LinkedIn networking platform, and their client relationship software Microsoft Dynamics – generates US$53 billion. The personal computing segment – Windows software and operating system, digital devices and Xbox gaming services – generates US$54 billion in annual revenue.
Alphabet/Google has leveraged its position as the world’s go-to search engine and developed a leading and exceedingly profitable online advertising business which is expected to generate a staggering US$189 billion in revenue in 2021. This represents 80% of the company’s total revenue. Despite its size, Alphabet/Google is growing at 20% per annum. The other major business segment is Google Cloud. While Google Cloud represents a relatively small percentage of overall revenue, it is a massive business in its own right with revenues of US$46 billion expected in 2021.
In total, these companies have a combined revenue of US$1.3 trillion. To put this in context, this is almost six times larger than New Zealand’s gross domestic product. In this article, we have kept things relatively straightforward and have not discussed the earnings these companies generate from their immense sales. Unlike many newer high-growth technology names (such as Zoom, the online video conferencing platform) which are rapidly growing their revenue but not yet making a profit, these five mega tech companies generate large and reliable earnings. As such, they offer investors growth-type investment characteristics but, at the same time, the FAAMG companies have increasingly become more defensive ‘safe haven’ assets in recent years.
Source: Bloomberg.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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Mark Brooks is a Portfolio Manager for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. Mark's comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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