Communication Services Sector Rating: Neutral

April 14, 2022
Schwab's views on the Communication Services sector.

The Communication Services sector includes telecommunication services (diversified and wireless) and media, entertainment, and interactive media and services. 

The Communication Services sector includes telecommunication services (diversified and wireless) and media, entertainment, and interactive media and services. 

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 consumers shift back toward traditional entertainment options. 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. 

The Russian invasion of Ukraine in late February, and the ongoing political response, has clouded our outlook on equity sectors. Due to the unprecedented and volatile series of events, the economic and market landscape has become highly uncertain. 

Until there is more clarity on how the sharp rise in commodity prices, tightening of financial conditions, and likely Federal Reserve interest rate hikes might impact the economy and underlying fundamentals that drive relative sector performance, we think it's prudent to maintain sector allocations that are in line with the overall market.

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:

  • Apple's ad-blocking feature could weigh on ad revenues for social media companies 
  • 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
  • Sector market capitalization is heavily concentrated in the top two stocks—Facebook and Google—whose movement can significantly influence the sector

Risks for the sector:

  • Social media regulation (Section 230 legal shield under scrutiny), plus President Biden's recent order on anti-competitive practices

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

Want to learn more about a specific sector?  Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in the Communication Services sector.

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

Want to learn more about a specific sector?  Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in the Communication Services sector.

* As represented by the S&P 500 index

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