Your Financial Future: Taking a bite out of FAANG stocks
Other than a brief blip in March 2020, the stock market had been on a 12-year bull market.
Since January of this year, the overall market is down around 20%. During much of the long-running bull market, the FAANG stocks were up much more than the overall market. During the 10 years from July 1, 2012 and July 1, 2022 the FAANG stocks were higher by: Facebook 415%, Apple 566%, Amazon 860%, Netflix 1,740% and Google 650%. During this time the S&P 500 gained 181%. The S&P are the 500 biggest U.S. companies.
It is important to remember that the S&P 500 is a weighted average where total market capitalization carries more weight. This is the value of all shares of stock plus the value of all bonds. This means that the FAANG stocks help to make the overall average higher than it had been traditionally.
Since the beginning of the year, the FAANG stocks have lost much more value than the overall market. Many are under performing. We discussed Netflix a few weeks ago. Its operational model had to completely change from being a distributor of hit movies made by others to the risker producer and distributor of its own content.
Facebook started out as an early social media company. People connected with friends and family. The company was able to learn many things about likes and dislikes of its users. Since there is not a fee to use Facebook, the company had to find a way to monetize its information. The company did this by selling access to its users through advertisements. Their algorithm finds advertisers access to people who are good prospects for whatever they are trying to sell.
Over time, Facebook bought Instagram and WhatsApp. This increased its potential advertising exposure. Lately, they have faced challenges. Apple changed the privacy setting on its iPhones. Without this information, Facebook cannot target some consumers as precisely. This change is expected to cost Facebook $10 billion a year in revenue.
Facebook has changed its name to Meta. They hope that they can find a new profit center in the Metashere, which is a make-believe virtual world. People will wear goggles and other apparatuses to live a fictional 3-D world. It is fairly easy to see how some video game players will want in. Other entertainment venues such as movie theaters might also be a good market. However, there are some people buying property for tens of thousand of dollars in this fictitious world. I can not image spending real money is this fake world. Meta is spending $10 billion this year trying to create this new market. Currently their stock is down 58% from their all-time intraday price less than a year ago.
In a future column we will discuss some of the other FAANG stocks. They all had great cash flow and seemed to not be able to do anything wrong. They used this cash flow to buy back billions of dollars of their own stock. This helped to mask a growth rate since buying back shares outstanding can make it appear earnings are climbing even if operating income is not growing as fast.
Many of these companies are facing increasing antitrust regulations. They have become so big and powerful that some government actions are possible. You can sometimes make more money in single stocks, but as we see right now, there is a possibility of bigger losses. Your portfolio should be diverse and match your timeline and risk tolerance.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.