Communication Services: Alphabet’s AI Strength Is Growing Across Multiple Dimensions

A flurry of good news has propelled Alphabet GOOG shares to new heights. The firm’s core ad business—which still accounts for more than 70% of revenue—remains red-hot, but the real action surrounds its AI efforts. Google Cloud’s growth accelerated throughout 2025, while Gemini 3, the AI model launched in November, surged past ChatGPT in performance tests, and the firm’s TPU chips are gaining attention as a potential alternative to Nvidia’s NVDA chips.

We believe Alphabet is extremely well-positioned heading into 2026. Each of its businesses supports the others in ways no other firm can match. Advertising will almost certainly be needed to generate sufficient revenue to justify AI investments. Alphabet is already moving to apply its ad expertise to Gemini. The cloud business also generates incremental revenue directly as Alphabet builds out new data center capacity. While the market has caught on, we would buy Alphabet shares on any weakness that pulls the stock meaningfully below our $340 per share fair value estimate.

The battle over Warner Bros. Discovery WBD highlights the value of core content franchises and high-quality studio capabilities when paired with strong distribution. Netflix NFLX has offered to pay $83 billion for the Warner production studios and HBO, including their content libraries, far above WBD’s $60 billion enterprise value—including its cable networks—prior to merger rumors surfacing. We believe Netflix is paying an excessive price, but the combined streaming customer bases and content libraries of both firms would leave the rest of the industry in a much weaker position.

Paramount Skydance PSKY hasn’t given up the fight for Warner, and it’s easy to see why. Combining the two firms would create a streaming business nearly as large as Disney’s, which itself is half the size of Netflix. Absent a merger, Paramount would be left among the other media laggards seeking a way to achieve sufficient scale to compete. We suspect Paramount would turn to NBCUniversal as its next target, but both firms own broadcast networks, which could raise regulatory concerns. Comcast has moved forward with the spinoff of Versant, which holds NBC’s cable networks, but with its total enterprise value well below $200 billion, we believe it should welcome any offer for its remaining media assets.

Top Communication Services Sector Picks

Comcast

• Fair Value Estimate: $44.00
• 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. Comcast’s shares yield more than 4%, and the firm has been using excess cash flow to repurchase shares. A shift in media strategy around NBC Universal could also serve as a catalyst to push the stock higher.

Walt Disney

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

We see Disney DIS as modestly undervalued, but it is still easily the most attractive of its video media peers, considering quality, risk, and valuation. We see a runway to accelerate top- and bottom-line growth over the next several years and a likelihood that the firm will exceed our near-term projections, which already account for macroeconomic risk. With linear TV revenue becoming much less material to overall results and added experiences capacity coming online, sales growth should accelerate. Ongoing profit improvements in the maturing streaming business and the commencement of new experiences revenue to catch up with the investment of the past few years should drive margin expansion at the same time.

Omnicom

• Fair Value Estimate: $115.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Traditional ad agencies like Omnicom OMC have been sapped by AI fears. AI-powered tools may hurt pricing power for creative and production services, but the core of the agency’s business now revolves around omnichannel marketing planning and managing data assets, which we believe will play an increasingly important role in a complex and fragmented ad ecosystem. With the IPG merger closed, we expect Omnicom to join Publicis in outperforming other agencies, thanks to its trainable data assets that can improve targeting and conversion efficiency.