The communications services sector covers a wide range of firms, from those making hardware to enable the connections to well known media companies.
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The ways people communicate, share information and experience entertainment have changed considerably over the past two decades. There’s been a convergence between technology, media and telecom firms as more of the world has moved online and software has become a key part of most businesses. In 2018, the Global Industry Classification Standard moved to expand the telecommunications sector into a wider communication services group.
This means the industry offers both defensive and growth oriented opportunities for investors. The providers of internet and mobile service providers firms are generally seen as more stable choices that benefit from regular payments from customers, who often have longer term contracts. Media and entertainment include firms that had significant impacts on the industry and had rapid growth, namely Netflix ($NFLX).
However, the streaming now faces a more competitive environment for clients that can easily switch, the entry of more diversified companies with Disney ($DIS) and Apple ($AAPL) that can cross-subsidise content. Tech giants Meta ($META) and Alphabet ($GOOGL) and Amazon ($AMZN) also dominate the digital advertising space, with their strengths going across several areas, they can be obvious choices for investors interested in blue chip stocks. Here are a few other stocks in the sector.
T-Mobile U.S. ($TMUS)
The wireless carrier offers data plans for consumers and business telecommunications services in the U.S. They managed to gain market share against competitors AT&T ($ATT) and Verizon ($VZ), mainly through the acquisition of Sprint in 2020. By adding an industry leading 1.6 million customers with phones contracts in Q2 2023, T-Mobile is the more growth oriented option amongst these three. Although it is already a large company, and its success will depend on providing better and largely more cost effective deals than others, which could put pressure on its margins over time.
However, the other two stocks can be a good choice for investors interested in dividends, being known for relatively high payout. T-Mobile is expected to pay its first dividend in Q4 2023 instead of returning cash to shareholders via buybacks. The company is known for its 5G network and high speed internet, with numbers related to these groups having the potential to affect the stock price. Investors should keep an eye out whether these services continue growth at the same rates.
Take-Two Interactive Software ($TTWO)
The game developer and publisher produces content for a range of consoles and audiences across the world. Take-Two expects the global video game market to recover to the highs of 2021 by 2024, with the forecasted US$221b industry being the largest entertainment vertical, ahead of film and TV. They benefit from owning the intellectual property for the popular Grand Theft Auto franchise and Rockstar Games portfolio, which gives investors a degree of insulation against the performance of single titles.
The 2022 acquisition of mobile game publisher, Zynga, expanded Take-Two’s reach in this area, but also involved taking on debt. Investors will need to weigh up whether the potential growth will continue to outpace expected debt repayments, some of which don’t mature until 2026. Q1 2024 net bookings (physical and digital sales minus cancellations) were at the higher end of expectations at US$1.2b, but there’s no guarantee of future performance. The proposed takeover of Activision Blizzard ($ATVI) by Microsoft’s ($MSFT) could also result in increased competition in the sector if the deal goes through.
Live Nation Entertainment (LYV)
The live music industry has come back rapidly after the COVID-19 pandemic. At the end of Q2 2023, Live Nation’s revenues were up 27% to US$5.6b and earnings per share increased 55% to US$1.02 on a year-on-year basis. There are even reports that high spending by customers around major tours could have contributed to inflationary circumstances themselves. However, investors should be mindful that the company could face a slowdown if inflation remains sticky and continues to put pressure on discretionary consumer budgets.
Live Nation’s revenues could be affected by the timing of the tours by specific artists and are expanding their number of international acts, as the particularly high earnings from Taylor Swift and Beyonce are not long-term features. The company has introduced an ‘all-in pricing’ initiative after complaints about misleading ticket prices, but investors should note that there is still a risk that of U.S. regulators investigating their practices. This event would negatively impact the share price in the short term.
There are several ETF options for investors who want to invest in the communications services sector generally, rather than looking for a specific stock. While the holdings of these ETFs operate in and gain revenues in a number of countries, their market is predominantly in the U.S. and investors worried about the economic conditions in the nation might look for other options. The iShares Global Telecom ETF ($IXP) is more diversified geographically.
Communication Services Select Sector SPDR ETF ($XLC) provides exposure to all these firms listed in the U.S. that fall within the largest 500 by market cap for an expense ratio of 0.10%. It’s a very similar offering to the Vanguard Telecommunication Services ETF ($VOX), which also has a fee of 0.10% and tracks the MSCI USA IMI Communication Services 25/50 Index.
Investors should note that at the end of August 2023, Meta ($META) accounted for 19.14% of all holdings in VOX, while Alphabet Class A ($GOOGL) and C ($GOOG) shares for a combined 23.13%. Many investors might already have these holdings separately and these ETFs would not provide a high degree of diversification. The Fidelity MSCI Telecommunication ETF ($FCOM) also follows the same index, but would be a better choice for cost conscious investors, as it has an expense ratio of 0.08%. Those searching for subsectors and wanting to benefit from specific trend might find the Defiance Next Gen Connectivity ETF ($FIVG) to their liking. This ETF contains U.S. listed stocks involved with the development or rollout of 5G. At mid-2023, it offered exposure to 78 firms responsible for infrastructure for cellular networks, mobile phones, chips, cloud computing and data centres for a fee of 0.30%.