Communication Services: Alphabet and Meta’s Ad Dominance Continues to Expand

Digital advertising demand has roared back, at least in the traditional search and social segments. Both Google Search and Meta posted accelerating sales growth during the third quarter, driven by high-single-digit pricing increases. But the emerging connected-television market has struggled amid surging inventory, as viewers migrate from traditional television to streaming and ad-supported offerings. Several media firms noted that streaming ad prices have been weak, and the five traditional media companies we track—Disney, NBC, Warner, Paramount, and Fox—collectively reported only a 2% increase in streaming ad revenue from last year.

We expect the streaming ad prices to solidify as advertisers gain experience with the medium, much as has happened with other digital offerings like Instagram Reels. Targeting and measurement should also improve, boosting demand. Still, we don’t believe the advertising opportunity is large enough to allow Netflix to sustain its current growth rate as its most important markets, especially the United States, near maturity. We still view Netflix’s share as substantially overvalued. For traditional media firms, streaming ad revenue won’t replace declining traditional television revenue anytime soon, but we expect it will enable their streaming operations to continue improving margins.

Alphabet shares have also surged on the release of proposed remedies in the Google Search antitrust case. The court’s decision largely confirmed our view, and we haven’t adjusted our fair value estimate, which sits below the stock’s price for the first time in over a year. We still believe the firm is well-positioned with its cloud business and AI capabilities, but the stock is no longer a top pick at its current valuation.

EchoStar’s decision to sell a portion of its wireless spectrum to AT&T and SpaceX has shaken up the traditional telecom world. The firm will shut down its wireless network, leaving big three wireless carriers as the only significant US network operators. The move eliminates the risk that EchoStar’s large chunk of spectrum would fall into the hands of a well-heeled new entrant, such as a tech giant or cable company. SpaceX’s nationwide control of a desirable spectrum block is likely to extend its lead in satellite services.

Top Communication Services Sector Picks

Comcast

• Fair Value Estimate: $49.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

Comcast CMCSA continues to shed broadband customers, pushing its share lower as investors fear this business is entering perpetual decline. We believe those fears are unwarranted. Unlike fixed-line phone service or traditional television offerings, demand for basic internet connectivity isn’t going anywhere. The market is undergoing a shift in competitive balance, but we expect this shift to run its course as fiber network expansion matures and wireless network capacity is absorbed. We believe competition will remain rational, allowing broadband prices to rise. Comcast’s shares yield more than 4%, and the firm has been using excess cash flow to repurchase shares

Walt Disney

• Fair Value Estimate: $120.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

We view Disney DIS as modestly undervalued. It faces significant economic and headline risk. However, economic weakness is built into our model, and if this weakness does not materialize, the stock looks cheap. The relative valuation looks especially compelling after the big recent run-up in lesser-quality companies, like Paramount and Warner Bros. Discovery, and the excessively rich valuation on Netflix. Experiences, which accounts for most of Disney’s profits, has been very strong and has ongoing sales and profit catalysts. Stabilization of media results should also lead Disney’s stock to become more in favor than it has been the past several years, when all traditional video media firms have been depressed.

Rogers Communications

• Fair Value Estimate: $47.74
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Low

Among Canadian telecom stocks that have been overly punished amid a wireless industry slowdown, Rogers RCI is our favorite. We don’t anticipate wireless results to turn upward any time soon, but the stock is more than priced for weak sales growth. New wireless customer additions should remain below historical rates as the government reduces immigration, and Quebecor is now competing in the national market. Competition should continue weighing on prices. We don’t envision such a weak market being a permanent change. We are more optimistic on the firm’s fixed-line business than we have been in years, as BCE and Telus have slowed fiber network expansion.