The giants of the communication services sector ($SRTS) have been on a roll over the past year, bolstered by the unstoppable buzz surrounding artificial intelligence (AI), which has uplifted many stocks within this sector. That said, Wells Fargo analysts remain highly bullish on the sector’s performance, highlighting its roughly 35% return over the past 52 weeks and 21.5% surge on a YTD basis.
Despite the financial institution’s optimistic year-end target for the broader market, Wells Fargo’s analyst Christopher Harvey cautioned against aggressively buying the dip due to recent market developments, traditional pre-Fed price action, and a lack of immediate catalysts.
However, the analyst highlighted the recent pullback in the communication services sector as a compelling entry point, with mega-cap stocks like Alphabet Inc. (GOOG), Meta Platforms, Inc. (META), and Netflix, Inc. (NFLX) standing out on their momentum screen. So, here’s a closer look at these three names.
Mega-Cap Stock #1: Alphabet
Mountain View-based Google’s parent company, Alphabet Inc. (GOOG), barely requires much introduction. In recent years, this tech titan has been infusing AI into its flagship products like Gmail, Google Maps, and Photos, making them more vital and efficient for everyday use. Valued at a massive market cap of $2 trillion, Alphabet earns most of its revenue from Google Search, the unrivaled leader in the global search engine market.
Shares of this tech giant are up 27.6% over the past 52 weeks, slightly outpacing the broader S&P 500 Index’s ($SPX) gain of 26% during the same time frame. In 2024, the mega-cap stock has surged 17%, mirroring the SPX’s 16.4% return on a YTD basis.
From a valuation standpoint, the stock trades at 21.78 times forward earnings, which is lower than its own five-year average of 25.81x.
On June 17, Alphabet paid its shareholders an inaugural dividend of $0.20 per share. Continuing this momentum, Alphabet unveiled another dividend of $0.20 per share on July 23 alongside its impressive Q2 earnings results. The company’s forward annualized dividend of $0.80 per share translates to a 0.49% dividend yield.
Alphabet’s Q2 performance exceeded Wall Street’s expectations on both the top and bottom lines. The Silicon Valley giant’s total revenue jumped almost 14% annually to $84.7 billion, driven by the company’s Search and Cloud segments. EPS for the quarter hit $1.89, marking a notable 31.3% year-over-year jump and topping estimates by about 2.2%.
A major highlight of the Q2 earnings report was the exceptional performance of Alphabet’s Google Cloud segment, which achieved a significant milestone by surpassing $10 billion in quarterly revenues and $1 billion in operating profit for the very first time. This represents an extraordinary turnaround for Google Cloud, which was unprofitable less than two years ago. Plus, the tech giant's revenue from its search segment stood at $48.5 billion, up 13.8% year over year.
During the quarter, Alphabet’s advertising revenue soared to $64.6 billion, an 11% rise from $58.1 billion in the same quarter last year. This growth was fueled by a revival in online advertising strength through Google Search, rebounding from the budget constraints imposed by inflation and higher interest rates over the past two years.
CEO Sundar Pichai highlighted, “We are innovating at every layer of the AI stack. Our longstanding infrastructure leadership and in-house research teams position us well as technology evolves and as we pursue the many opportunities ahead.” Analysts tracking Alphabet project the company’s profit to reach $7.62 per share in fiscal 2024, up 31.4% year over year, and grow another 13.1% to $8.62 per share in fiscal 2025.
GOOG stock has a consensus “Strong Buy” rating overall. Out of the 44 analysts offering recommendations for the stock, 34 suggest a “Strong Buy,” three advise a “Moderate Buy,” and the remaining seven give a “Hold” rating.
The average analyst price target of $203.76 indicates a potential upside of 23.2% from the current price levels. The Street-high price target of $225 suggests that GOOG could rally as much as 36%.
Mega-Cap Stock #2: Meta Platforms
Valued at roughly $1.3 billion by market cap, California-based Meta Platforms, Inc. (META) is the world's leading social media powerhouse. Since Facebook's groundbreaking launch in 2004, Meta has redefined global connectivity. Leveraging platforms like Messenger, Instagram, and WhatsApp, the company has significantly expanded its worldwide reach.
Having already revolutionized the social media landscape, Meta is now pioneering the next evolution in social technology through immersive experiences in augmented and virtual reality. Meta shares have rallied almost 80% over the past 52 weeks and 49.5% on a YTD basis, easily crushing the SPX’s gains during both time frames.
On June 26, the company paid its shareholders a quarterly dividend of $0.50 per share. The company’s annualized dividend of $2.00 per share translates to a 0.37% dividend yield.
Priced at 24.85 times forward earnings, META stock appears expensive when compared to its industry peers. However, the stock is quite a bargain compared to the lofty valuations of other “Magnificent Seven” stocks, such as Nvidia Corporation’s (NVDA) 43.03x and Tesla’s (TSLA) 110.22x.
Following the company’s Q2 earnings results on July 31, which blew past Wall Street’s top- and bottom-line expectations, shares of Meta popped 4.8% in the subsequent trading session. Revenue of $39.1 billion climbed a notable 22% year over year, narrowly edging past estimates. Plus, EPS of $5.16 showed a remarkable 73.2% annual jump, and sailed past Wall Street’s projections by nearly a 9.8% margin.
The company’s financial stability during the quarter was evident, with approximately $58.1 billion in cash, cash equivalents, and marketable securities, alongside a free cash flow of $10.9 billion. Commenting on the Q2 performance, CEO Mark Zuckerberg said, "We've released the first frontier-level open source AI model, we continue to see good traction with our Ray-Ban Meta AI glasses, and we're driving good growth across our apps.”
For Q3, management forecasts total revenue to range between $38.5 billion and $41 billion. As for fiscal 2024, management has increased its capital expenditure forecast to a range between $37 billion and $40 billion, compared to the earlier estimate of $35 billion to $40 billion.
While specific guidance for fiscal 2025 will be provided in Q4, the company anticipates substantial growth in infrastructure costs next year as it incorporates depreciation and operational expenses from its expanded infrastructure. Meta also expects a significant increase in capital expenditures in 2025, driven by investments in AI research and product development.
Analysts tracking Meta project the company’s profit to increase 43% year over year to $21.27 per share in fiscal 2024 and climb another 13% to $24.03 per share in fiscal 2025.
META stock has a consensus “Strong Buy” rating overall. Out of the 45 analysts covering the stock, 39 suggest a “Strong Buy,” one advises a “Moderate Buy,” three recommend a “Hold,” and the remaining two give a “Strong Sell” rating.
The average analyst price target of $570.83 indicates a potential upside of just 7.9% from the current price levels. However, the Street-high price target of $647 suggests that META could rally as much as 22%.
Mega-Cap Stock #3: Netflix
Founded in 1997, Los Gatos-based Netflix, Inc. (NFLX) is focused on bringing entertainment to the world with a diverse lineup of TV series, documentaries, films, and games. With a hefty market cap of roughly $286 billion, the company is a dominant force in the entertainment landscape, boasting a staggering 278 million paid memberships, and offers high-quality content in more than 30 languages in over 190 countries.
Shares of this entertainment giant have soared 62.7% over the past 52 weeks and 38.7% on a YTD basis, overshadowing the SPX’s returns during both periods.
In terms of valuation, NFLX stock is trading at 33.18 times forward earnings, much lower than its own five-year average of 48.11x, indicating an attractive entry point for investors at current levels.
The streaming giant announced its Q2 earnings results on July 18, which topped Wall Street’s predictions on both the top and bottom lines. Revenue hit approximately $9.6 billion, marking a 17% increase from the previous year, largely driven by 16.5% annual growth in global paid memberships to a stunning 278 million. Notably, this represents one of the final reports Netflix will provide on its membership numbers.
The entertainment company’s EPS of $4.88 reflects a solid 48.2% year-over-year jump. During the quarter, $1.6 billion was spent on share repurchases, with $5 billion still available under the buyback plan. At the end of the quarter, cash and short-term investments totaled $6.7 billion.
Looking forward to Q3, the company anticipates revenue to come in at $9.7 billion, reflecting a 14% year-over-year growth, while the operating margin is projected to be around 28.1%. Also, EPS for the quarter is expected to be $5.10.
Revenue growth for fiscal 2024 is now forecasted to be between 14% and 15%, slightly up from the prior range of 13% to 15%, reflecting strong membership trends and business momentum. Operating margin is projected at 26% for the entire year, an improvement from the previous estimate of 25%, supported by better revenue prospects and disciplined expense management.
Analysts tracking Netflix project the company’s profit to increase 58.6% year over year to $19.08 per share in fiscal 2024 and rise another 19.1% to $22.72 per share in fiscal 2025.
Overall, NFLX stock has a consensus “Moderate Buy” rating. Out of the 39 analysts covering the stock, 21 suggest a “Strong Buy,” two advise a “Moderate Buy,” 15 recommend a “Hold,” and the remaining one has a “Strong Sell” rating.
The average analyst price target of $694.77 indicates a potential upside of just 2.8% from the current price levels. However, the Street-high price target of $800 suggests the NFLX could rally as much as 18.4% from here.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
