fang-companies

FAANG Companies: Why Are They So Hot?

FAANG is an acronym that comprises the hottest tech companies’ stocks. Those are Facebook, Amazon, Apple, Netflix and Alphabet’s Google. The term was coined by Jim Cramer, former hedge fund manager and host of CNBC’s Mad Money and founder of the publication TheStreet:

What’s interesting about the FAANG is how those companies together form more of an ecosystem of how people consume content, purchase things and find information on the web. Thus, it is worth giving a look under the hood of the companies that comprise the FAANG ecosystem.

The FAANG ecosystem

When we speak about tech, in the last decades we often refer to the IT space. With the rise of the web, a new wave of tech companies have taken over the business world. Those tech companies have the ability to influence the way people behave, consume content and purchase things.

Those tech companies are considered “hot” often make the news. There are a few aspects why those companies manage to capture so much attention:

  • in some ways some of the FAANG companies (think of Facebook, Google and Netflix) do make money by capturing the attention of as many people as possible (so-called attention merchant)
  • they’ve been able to become multi-billion businesses in a relatively short span of time
  • they’ve changed the way we thought about ourselves (think of Facebook convinving us that personal branding is a end in itself)
  • they’ve changed the way we think about our societies (think of the Netflix series have the ability to form cults)
  • they’ve changed the way we think about entrepreneurship (Steve Jobs’ “Stay Hungry, Stay Foolish” has become a mantra among millions of entrenrepeurs and aspiring businessmen)

FAANG businesses dissected

faang-revenues

FAANG companies have been able to become multi-billion dollar businesses relatively quickly. For instance, in 2017 Facebook passed the $40 billion revenue mark. While Google passed the $110 billion revenue mark. Apple by far was the tech company with the highest revenue at almost $230 billion.

faang-net-incomeIt is critical to notice that the FAANG companies run different business models. And that is also why they carry a different level of profitability. In some cases, a lower profitability might be driven by the industry in which one of the FAANG operations but also from strategic choices. For instance, even though Amazon is the one with the highest revenues, right after Apple, it is the company with the lowest net income, after Netflix.

I’ve explained many times how Amazon runs a cash machine business where with extremely low profits it is able to generate massive cash flows.

RelatedHow Amazon Makes Money: Amazon Business Model in a Nutshell

Instead, if we look at Apple, the company has high revenues and high margins. This is in part due to its razor and blade strategy and also thanks to Apple’s to keep high margins on its iPhone and related products.

FAANG business models in a nutshell

faang-business-models

The FAANG companies are run primarily via five four main business models:

It is important to notice how most of the FAANG companies have been investing in other areas to diversify their revenue generation.

faang-businesses-in-a-nutshell

Beyond Facebook, and Netflix which primarily make money via advertising (the former) and membership fees (the latter), Amazon, Apple, and Google have a more diversified revenue generation.

Google, now Alphabet made 86% of its revenues via advertising, yet Google isn’t just about advertising anymore. Even though online stores, is still Amazon primary revenue generation stream, there are other segments of the business that are quite interesting and might become massive in the coming decade.

Indeed, Amazon AWS, born as an experimental business unit it has become a competitive and large business in its own sake. Amazon also started to generate a good chunk of its revenues via membership with its Amazon Prime Subscription Program.  Another interesting aspect of Amazon is its ability to generate revenues via advertising and third-party seller services. In short, the Amazon business model is like an octopus that is able to get in and be successful in many industries with several revenue streams. As Jeff Bezos would put it, it’s all about being in day one.

Apple revenues still primarily depend on the sales of its iPhone, yet considering Apple just a product company might be limiting. Apple srenght is definitely in its brand and the unique experiences it has been able to design via its devices that integrated work extremely well together.

What’s so special about that FAANG?

In this historic period, FAANG companies managed to get most of our attention. There isn’t a single day when one of those companies make the news. Yet what is hot today might not be so tomorrow. So the question is, would those companies still be so hot in ten, twenty years time?

FAANG business models:

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Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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