Communication Services Sector Rating: Neutral
Pandemic-related stay-at-home behaviors have been good for some companies in the sector, leading to increased use of social media and demand for streaming entertainment—although the pace of enrollments is likely to ebb as traditional entertainment options continue to reopen. Traditional broadcast and cable TV advertisers have struggled, but are quickly pivoting toward online mediums. Wireless service revenues and equipment sales are being supported by the initial rollout of fifth generation (5G) cellular technology. While the larger social media companies (Alphabet/Google and Facebook) enjoy significant competitive advantages due to their dominance in their respective business lines—search engine and social media—they also face emerging antitrust risks, headwinds from Apple’s ad-blocking feature, as well as potential market saturation.
Longer term, we believe the continued expansion of 5G could further increase growth within the sector, as it continues to increase demand for equipment and services. Upgrading networks will require substantial capital investment, but federal government infrastructure initiatives could result in subsidies and investment.
Positives for the sector:
- The competitive advantage for social media
- 5G rollout should boost growth potential
- Government infrastructure investment should ease 5G capital expenditure burden
- Strong streaming entertainment enrollments, but the pace has likely peaked
Negatives for the sector:
- The antitrust regulatory trend is negative for the search engine and social media companies
- Streaming services risk market saturation, and new competition could limit pricing power
Risks for the sector:
- Sector market capitalization is heavily concentrated in the top two stocks—Facebook and Google—whose movement can significantly influence the sector
- Apple’s ad-blocking feature could weigh on ad revenues for social media companies
What do the ratings mean?
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market*
- Underperform: likely to perform worse than the broader stock market*
- Neutral: no current view on likely relative performance
* As represented by the S&P 500 index
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