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The FANG stocks - Facebook Inc. (NASDAQ: FB), Amazon.com Inc. (NASDAQ: AMZN), Netflix Inc. (NASDAQ: NFLX), and Alphabet Inc. (NASDAQ: GOOGL) - have a combined market capitalization of around $2.3 trillion. That jumps up to around $4 trillion when you include Apple Inc. (NASDAQ: AAPL) and Microsoft Corp. (NASDAQ: MSFT). Needless to say, this group of six tech companies holds a ton of sway in the market.
That's why investors were worried when those companies lost $945 billion in major stock sell-offs in the latter half of 2018. At one point, Facebook suffered a historic single-day sell-off to the tune of $119 billion. Things were not looking good for the FANG stocks.
And now it seems the tides are turning. The FANG companies - plus Microsoft and Apple - have gained $916.2 billion in market value so far this year. Their recent comeback brought the S&P 500 up with it for a 16% gain.
Here's how the FANG stocks, including Microsoft and Apple, did in Q4 2018 versus this year to date.
|Company||Q4 2018||Year to Date|
|-$108 billion||$144 billion|
|Amazon||-$239 billion||$191 billion|
|Netflix||-$46 billion||$48 billion|
|-$112 billion||$147 billion|
|Microsoft||-$98 billion||$170 billion|
|Apple||-$342 billion||$216 billion|
The tech sector used to be thought of as cyclical. But this chart shows that even when they do suffer in the market, these tech giants bounce back quickly.
A few decades ago, tech products were considered nonessential to businesses and consumers. But with technology so deeply engrained into business and personal needs, these tech stocks are less susceptible to decline during economic downturns.
Microsoft, Apple, and the FANG stocks now benefit from subscription-based revenue models. This provides steadier revenue than one-off purchases. Norm Conley, Chief Investment Officer for JAG Capital Management, explains: "Enterprise software used to be a big-ticket deployment. If you were going to deploy Oracle, or get everyone Adobe, those were big one-time investments."
The tech giants are built around intellectual capital. These modern companies can maintain large profit margins because they have lower labor and material expenses. Michael Wursthorn of The Wall Street Journal writes, "Profit margins among these companies also remain relatively fat at a time when many firms are coping with higher labor costs due to a robust jobs market and rising material costs." They are selling an idea just as much as they are selling an actual product. So, they can increase their output without greatly increasing their operating costs. This gives the tech sector an advantage over other sectors.
Also, there is the potential for the U.S. Federal Reserve to cut interest rates. This would increase investor activity and benefit the tech sector.
These factors lead analysts to believe Microsoft, Apple, FANG, and similar stocks will continue to outperform the S&P 500 in 2019. There is good reason to be bullish on the FANG stocks.