Communication services had a breakaway year in 2023.
The sector—which includes companies like Meta Platforms (
Yet even after the year’s strong performance, the sector could be heading into 2024 with open runway still ahead of it. As of late 2023, sector valuations were still attractive and earnings estimates had been moving in a positive direction. And even though earnings have been reaching record levels and many stocks have shown momentum, the sector still hasn’t returned to prior peak stock prices.
2023: Earnings recovery and a lift from AI enthusiasm
While the sector has seemed to have the wind at its back in recent months, that wasn’t the case a year ago. Sector performance was so poor in 2022 that it was dubbed the year of the “tech wreck” (many communication services companies are popularly thought of as tech companies). That year’s poor performance was owed to a combination of issues, including falling spending on digital advertising (which is the lifeblood of revenues for many communication services companies), rising expenses, slowing earnings, and a shift in investor preferences.
But in 2023, the winds shifted again. Digital advertising began to rebound, communications companies reined in spending, earnings bottomed out and began to recover, and mega-cap communications stocks came back into favor—partly due to a sense that the Fed’s rate-hike cycle was nearing its end, and partly due to investor interest in companies at the forefront of advances in generative AI. As of mid December, communication services was in second place for performance among all sectors (just behind technology).
2024: Potential opportunities in AI—and beyond
Communication services offers a diverse array of companies, ranging from more economically sensitive businesses, such as digital and traditional advertising, to areas that are less so, including wireless and broadband service providers. Across this spectrum, I believe that there are many specific investment opportunities among companies that can benefit from growth in digital services and demand for faster broadband.
Of course, there is no trend that garners as much hype, but also as much promise, as AI. While buzzwords like “generative AI” may have only rocketed into mainstream headlines in the past year, AI had actually already been driving growth in this sector for more than a decade. I believe that several communication services companies could be well positioned to benefit from the continued evolution of generative AI capabilities.
Among the sector’s media and internet companies, the success of digital advertising has come from machine learning, a branch of AI that uses data and algorithms to make predictions about human behavior—helping to optimize recommendations for content (and ads) to show. With machine-learning capabilities, firms like Meta Platforms, parent company of Facebook and Instagram, and Alphabet, parent company of Google, have been able to offer consumers hyper-personalized experiences based on their search, purchase, and viewing history—fostering greater engagement and better ad targeting. By unlocking this hyper-personalization, AI has already been driving much better efficiency and incredible value in connecting businesses with consumers to drive revenue.
Further advances in AI should increase these efficiencies. For example, the recent developments in generative AI could help advertisers home in on not just who to target with ads, but how to target them—such as by generating text, images, video, or audio that is personalized and designed to encourage users to take action. This could spell benefits for companies that sell digital ad space.
The communication services companies that may be uniquely positioned to harness the power of generative AI may be ones that have access to significant computing power, engineering talent specialized in AI, and massive amounts of data required to customize AI-driven models. Distribution may play an important role in introducing new generative AI experiences at scale, which could lend an advantage to the largest companies—such as ones that have daily interactions with billions of global users. Companies that have illustrated this investment thesis include Meta and Alphabet.
Fund top holdings1
Top-10 holdings of the Fidelity® Select Communication Services Portfolio (
- 24.0% – Meta Platforms Inc. (
) - 19.1% – Alphabet Inc. (
) - 6.8% – Netflix Inc. (
) - 5.0% – Walt Disney Co. (
) - 4.9% – AT&T Inc. (
) - 4.3% – Liberty Broadband Corp. (
) - 4.3% – Amazon.com Inc. (
) - 4.2% – Charter Communications Inc. (
) - 3.1% – T-Mobile US Inc. (
) - 2.8% – Uber Technologies Inc. (
)
(See the most recent fund information.)
These tailwinds could be felt beyond just the realm of digital advertising. Communication services also includes telecom, cable, and satellite companies. As digital engagement continues to grow, so does demand for connectivity, which could benefit providers that can most cost-effectively deliver high-quality, fast broadband service through fiber or 5G networks. Companies that have illustrated this investment thesis include cable providers Liberty Broadband (
Exciting trends point to a potentially promising outlook
It is difficult to predict any sector’s performance over a given time period, either in relative or absolute terms. And it’s similarly futile to try to guess what areas of the market investors will favor in a particular year. But in my opinion, positive momentum, reasonable valuations, healthy earnings, and a solid long-term tailwind seem to create a constructive setup for communication services in the year ahead.
Generative AI is a new chapter with the potential to drive incremental engagement and enhance relationships between companies and consumers with increasing efficiency. Ultimately, the success of AI will be measured by its ability to delight and engage consumers and to make businesses more productive. The communication services sector has many companies at the forefront of this trend, as well as the infrastructure to support an increasingly digital economy.
Matt Drukker is a portfolio manager and research analyst in the Equity division at Fidelity Investments.
In this role, Mr. Drukker manages the Fidelity Select Communication Services Portfolio, Fidelity Communication Services Central Fund, VIP Communications Services Portfolio, and Fidelity Select Wireless Portfolio. Additionally, he is responsible for covering the communication services sector including telecom, media, video games, and large-cap internet and media stocks.
Prior to assuming his current responsibilities, Mr. Drukker managed the Fidelity Select Telecommunications Portfolio and co-managed Select Wireless Portfolio. In addition, he covered the restaurant industry and was responsible for managing the communication services sub-portfolio of the Fidelity Stock Selector All Cap Fund. Previously, he was an intern in Fidelity's Equity Research division.
Before joining Fidelity full time in 2007, Mr. Drukker was an investment banker in New York, specializing in mergers and acquisitions and capital raising for financial institutions. He has been in the financial industry since 1999.
Mr. Drukker earned his bachelor of arts degree in economics from Williams College and his master of business administration degree in finance from The Wharton School of the University of Pennsylvania.