The Communication Services sector includes cutting-edge companies with which nearly all Americans have contact on a daily basis—including search engine and social media companies, streaming services and wireless telecommunications companies. While the widespread use of the sector’s products and services helps to attract investor interest, companies in the sector also struggle with intense competition for consumers’ attention. This raises the possibility that some of the current sector leaders may be reaching a market saturation point, which could curb future growth.
On the positive side, wireless technology demand is rising as communication and media devices increasingly move to the wireless arena, providing the potential for revenues to rise. Meanwhile, the rollout of fifth-generation (5G) cellular wireless technology could increase demand even more, as 5G is expected to increase speeds and allow far more devices to be connected at the same time. Meanwhile, advertising revenue also has been strong, as advertisers have been attracted by online sources’ ability to target ads to specific consumers.
On the other hand, pursuing new technologies and providing attractive content costs money, and we believe those costs are likely to grow. Some companies in the sector have begun to attract more attention from lawmakers, who have expressed concerns about their size and how well they’re protecting consumers’ privacy. In Europe, antitrust issues have resulted in pushback against the big U.S. companies in the form of fines, taxes and regulation. The rise in local regulation adds complexity and cost to providing users with fast and universal access to data that is increasingly segregated behind layers of different regulations.
We currently believe many Communication Services companies face risks that outweigh their potential rewards, which is why we have an “underperform” rating on the sector.
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
- Marketperform: likely to track the broader stock market
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
What You Can Do Next
- Review your sector allocation. If you aren’t sure how to analyze your sector weightings, a Schwab Financial Consultant can help.
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