Plenty of Opportunity in Communication Services Sector

The end of 2021 hasn't been kind to communications stocks as the Morningstar US Communications Services Index has declined about 1% during the fourth quarter (through Dec. 23) versus a nearly 9% gain for the broader market. These figures understate how badly the sector has performed, as

The Communications Sector Took a Beating in the Fourth Quarter

Source: Morningstar analysts

Each Segment Now Offers Opportunities

Source: Morningstar analysts

The carnage during the past quarter has been widespread by subsector, but smaller social media firms have taken the worst beating--

Though Tiny Versus Alphabet, Smaller Online Firms Continue to Grow

Source: Morningstar analysts

Media firms have also suffered, with everything from

ViacomCBS Is Growing Nicely; HBO Took a Hit to Leave Amazon

Source: Morningstar analysts

Traditional telecom stocks have continued to drift lower amid numerous fears surrounding the competitive environment. We believe the U.S. telecom industry is poised to deliver consistent, albeit modest, growth. Highly indebted

Top Picks

Pinterest

PINS

Star Rating: ★★★★

Economic Moat Rating: Narrow

Fair Value Estimate: $67

Fair Value Uncertainty: Very High

We expect Pinterest to benefit from the return of brand advertising spending in addition to growth in e-commerce as the economy continues to recover from the pandemic. The firm also should continue to attract direct-response advertising as most of its users access the app with the intention to purchase immediately or in the future. The addition of try-on features has made engagement with ads stronger and conversion to actual sales more likely. We also think that increasing focus on video pins will bring more brand marketing campaigns onto the platform. All this likely will drive top-line growth and margin expansion for the firm.

T

Star Rating: ★★★★

Economic Moat Rating: Narrow

Fair Value Estimate: $36

Fair Value Uncertainty: High

We believe AT&T management is putting the firm back on the right path, bringing a much-needed telecom focus, rebuilding the brand's image among consumers. We expect the wireless business will deliver consistent growth, allowing cash to remain solid after the Warner spin-off. Increased fiber investment should also provide revenue growth and some differentiation versus cable and wireless rivals. We believe HBO Max has built strong momentum that will solidify its place in the living room as Warner joins with Discovery. Even the dividend reduction, we expect the stock will deliver a 4%-5% yield.

ViacomCBS

VIAC

Star Rating: ★★★★★

Economic Moat Rating: Narrow

Fair Value Estimate: $61

Fair Value Uncertainty: High

We believe ViacomCBS possesses the content breadth and depth to ensure that it remains entrenched in any traditional television service while also providing plenty of material for Paramount+, its revamped direct-to-consumer streaming offering. ViacomCBS' roster of paid streaming services, which also includes Showtime, has posted relatively strong growth recently since the shift to Paramount+ in March 2021. The free Pluto TV platform is also expanding rapidly as more content from ViacomCBS has been added to the streaming service. We expect that the ongoing international expansion will help to keep growth on track for both Paramount+ and Pluto.