Chances are you’ve heard of the FAANG companies. Facebook, Apple, Amazon, Netflix and Google have been crushing the market and many investors seem worried about sky-high valuations and the consequences of uncertainties in global markets. In this article, we’ll discuss some factors about the FAANG companies so you can decide whether they’re still a good investment.
Are FAANG companies overvalued?
With a recent bull market followed by geopolitical factors, analysts remain undecided and have difficulty agreeing on the valuation standpoint of the FAANG stocks. While the fundamentals are looking strong, FAANG has always been subject to popularity and a steep rise in investing popularity and market density has caused prices to rise to high valuations.
If stocks are highly overvalued, you won’t realize market standardized long-term profits while the fundamentals remain present.
The earnings per share (EPS) formula is earnings available to common shareholders divided by the number of common shares outstanding. When calculating EPS, companies can improve by increasing profits or decreasing the total amount of outstanding shares. Improvement in share value comes when EPS measures a firm’s profit. After all, the more earnings a company can create per share, the more valuable each share is to investors. Analysts also frequently use the price-to-earnings (P/E) ratio for company valuation, computed as the market price divided by earnings per share (EPS).
For example, when we look at Amazon, analysts often compare the e-commerce giant with the Chinese equivalent, Alibaba. Analysts can compare these giants because both companies serve as intermediaries for merchants, profiting from each sale. To illustrate, Alibaba has a P/E ratio of about one-third the size of Amazon’s at 17.7 times earnings, comparable to Amazon’s 52 times earnings for different periods in 2022. However, both firms are still developing at a rapid pace. In other words, the quality of both organizations’ earnings is relatively similar.
Of course, Chinese giants have investors worried about possible delistings. Still, Amazon’s valuation compared to similar companies seems high. So chances are that when you decide to invest in FAANG companies, you might be paying the premium for future growth.
What are the advantages of investing in FAANG companies?
Investing in the giants of the American market can come with massive benefits and advantages. For example, all FAANG companies have excellent fundamentals and long-trailed performance, combined with experience and highly qualified leadership. Moreover, these companies have managed to survive the worst market conditions and tend to drive during economic downturn.
FAANG companies contribute to approximately 40 percent of the index movement of the S&P 500 and have a combined market capitalization of over 9 trillion US dollars. Therefore, investing in these companies can come with significant returns, making them a popular choice for investors.
In addition, FAANG stocks make for a significant diversification of your portfolio. Investors consider FAANG to be relatively low risk. By investing in these companies, you are exposed to a user base generating cash flow worldwide, which also serves as diversification.
So, should I invest in FAANG stocks?
If you’re planning to stay invested in Apple, Facebook, or any of the FAANG companies for a very long time, you won’t notice too much in terms of valuation issues. However, if you would like to invest in these companies for a shorter period, we’d suggest you take a trading class or look at our article on value investing. These articles can teach you how to capitalize on markets based on your personal preference.