If you're wondering where to begin when it comes to investing, you can't go past blue chip stocks. Investing in blue chip stocks has long been favoured by investors seeking long-term growth and income with these companies widely seen as stable and financially sound investment alternatives. Some other characteristics associated with blue chip stocks include being large, well-established, with a history of consistent performance, a strong market presence and a recognisable moat. In this article, we will consider what blue chip stocks are, and the main differences between the five blue chip stocks that constitute the FAANG index.
What Are Blue Chip Stocks?
Blue chip stocks are shares of large, well-established companies that are highly sought after by long-term investors due to their impressive fundamentals. These companies boast strong financial positions, showcase market dominance and have a reputation for reliable dividends or growth. With substantial market capitalisation and extensive business operations, they have carved a place for themselves in the financial world and consistently deliver impressive earnings year after year. Given their established track record , blue chip stocks are often considered less volatile than smaller, less liquid stocks. This inherent stability makes them particularly enticing to conservative investors who have a lower risk tolerance level and prefer dividend income as opposed to rapid growth potential.
Interestingly, the term "blue chip" originates from the world of poker, where the highest-valued chip is coloured blue. The analogous value of blue chip stocks is derived from their strong financials and profound impact on the market as a whole, further bolstering their appeal to investors seeking reliability and long-term growth prospects.
Why Do Most People Tend to Invest in Blue Chip Stocks?
Many investors prefer to invest in blue chip stocks as they are less likely to experience dramatic fluctuations in value compared with other stocks. Typically, these stocks pay consistent dividends that can be used to increase their portfolio's yield or reinvested for more growth potential over the long term. Additionally, many of these companies are household names and have great news coverage, allowing investors to stay up to date with the latest developments without needing to rummage through financial statements or go through extensive headlines.
Now that you're familiar with the concept of blue chip stocks and why investors tend to buy them, it's worth building your understand of what the FAANG stocks are and why they're considered the cream of the crop among blue chip stocks.
What Are FAANG Stocks?
FAANG is an acronym representing five major technology companies: Facebook (now Meta Platforms), Apple, Amazon, Netflix, and Google (now Alphabet). The acronym was originally coined by CNBC personality Jim Cramer in 2013 and the term has stuck ever since. These companies are renowned for their innovation, disruptive technologies and substantial influence in the tech realm; so much so that investors are hailing them as the blue chip stocks of the tech sector. As the term was coined a decade ago, FAANG has slowly evolved into MAMAA to account for recent developments.
The Transition From FAANG to MAMAA
Before zooming into the individual stocks, it's key to first understand why investors are talking about FAANG less and MAMAA more. Contrary to popular belief, there isn't much difference between MAMAA and FAANG stocks. With the exception of Netflix being removed and Microsoft being included, the FAANG stocks have simply been rebranded because of name changes among its constituent stocks. Facebook was renamed to Meta Platforms while Alphabet was created to restructure Google.
As for why Netflix was replaced by Microsoft, Cramer addressed it in a 2021 show. According to Jim, Netflix fell out of favour because its market capitalisation failed to keep up with its peers. On the other hand, Microsoft was slowly starting to gain steam again under the guidance of CEO Satya Nadella, leading to a significant increase in revenue expectations and growth prospects.
MAMAA Stocks: A Closer Look
Now that we're clear on why investors are keen on buying the best of the best blue chip stocks like MAMAA, let's take a deep dive and explore the strong fundamentals of Meta Platforms, Apple, Microsoft, Amazon and Alphabet.
Meta Platforms is widely considered a blue chip stock due to its strong fundamentals, long history of profitability and sound strategic investments. It has created a robust ecosystem of products and services that are used by millions of people every day. These include Facebook, Instagram and WhatsApp to name a few. Rather than just play it safe, Meta constantly diversifies its revenue sources with strategic investments in new forms of technology. From venturing into theMetaverse to conducting generative artificial intelligence research withMeta AI, Meta doesn’t shy from embracing growth and the risks associated with it. Additionally, Facebook's market capitalisation has consistently grown year on year, making it one of the most valuable companies worldwide. All these factors combined make it a top choice for investors who wish to include a blue-chip stock in their portfolio.
Apple is another blue chip stock that enjoys considerable popularity. Since revolutionising computers with the Macintosh, and mobile phones with the iPhone, Apple has continued with its signature level of innovation as it refines and improves its ecosystem with additions like the Apple Watch, Airpods and upcomingVision Pro headset. On top of appealing to the mass market with their array of products, Apple has a strong balance sheet that boasts consistent profits and cash flow over the years. Instead of resting on its laurels, Apple continues to invest in cutting-edge research and development which has resulted in the continual introduction of new products and services that have kept it growing year on year. All these factors combined make it an attractive investment for those looking to diversify their portfolio with a blue-chip stock that is dedicated to continually growing the Apple ecosystem.
Even before kickstarting the generative AI craze with OpenAI’s ChatGPT, Microsoft hit a turning point when Satya Nadella took over the reins of the company. By bringing agrowth-centric mindset to the tech giant, Microsoft shed its rigid and inflexible culture for one that’s in favour of things like coaching and personal growth. This change in internal philosophy helped transform Microsoft into one of the best places to work at according to Glassdoor, which in turn helped Microsoft become more receptive to new and fresh ideas. From increasing its reach by Office productivity apps on iPhones to distancing product lines like Azure from the Windows brand, the changes signified Microsoft’s willingness to adapt with the times and adopt a growth-oriented mindset. This culture shift combined with its stellar fundamentals like consistent cash flow and profitability made Microsoft’s inclusion into MAMAA among the top blue chip stocks a no brainer.
Amazon has become one of the world’s most popular blue chip stocks to invest in because of its aggressive innovation and expansion into multiple markets. Its e-commerce business model provides convenience with last mile delivery, prices its listings competitively and offers a wide variety of extra services. This ultimately makes it an attractive option for consumers and businesses alike. Additionally, Amazon has also embraced technology in a big way by offering cloud-based services such as Amazon Web Services (AWS) and Amazon Prime Video. This focus on subscription-based revenue has granted Amazon additional revenue streams that complement the already established e-commerce business. With all these factors combined, it’s no wonder why Amazon is now one of the largest tech companies in the world and remains extremely popular as a blue chip stock option.
Lastly, Google, under the parent company Alphabet, is also considered a blue chip stock with the potential for exponential growth. With a current market valuation of over US$1T, Alphabet is one of the most dominating tech companies in the world. This is largely due to the fact that Google is the world's largest search engine. On top of making Google search so accessible, Alphabet has also extended its reach through its suite of free programmes and services like Google Workspace, Google Maps and Google Lens. It’s this focus on diversifying its software offerings and innovating with its products that makes Alphabet such a strong player in the tech space. Alphabet is even on top of things with the recent generative AI frenzy as it has developed Bard – Alphabet’s own conversational generative artificial intelligence chatbot. All of these are just some of the reasons why Google is a great choice for those looking for a blue chip stock to add to their long term portfolio.
The Bottom Line
In conclusion, blue chip stocks like the ones part of MAMAA (previously known as FAANG) represent companies with impressive financial performance and market influence. We hope our guide has helped supplement your understanding of what makes these blue chip stocks special. From the massive scale of Amazon to the continued innovation of Apple, it's easy to see why beginner and experienced investors are interested in these stocks and regularly add these names to their portfolios. In many cases, such blue chip stocks are seen as a safe bet as they're less prone to huge price fluctuations and have a strong history of consistent returns