Artificial intelligence. 5G. Streaming video. Video games.
These are the most substantive markets in technology … and yet, to find some of the biggest and best investment opportunities within these trends, you'll have to travel outside the technology sector.
To communication services.
Communication services stocks, the newest of the market's 11 sectors, are composed of various tech-adjacent firms involved in media and communications. It's a mishmash of names that once belonged to other sectors, spanning high-growth innovators to stodgy near-monopolies with jumbo-sized dividends.
Today, we'll explore communication services stocks, including how the sector is defined, why investors are attracted to its component companies, and how to find the best ones to buy.
What are communication services stocks?
We've said this before in our discussion of technology stocks:
"You can typically guess a firm's sector based on a gut feeling. If a business has mining operations, it's probably a materials stock. If a company's predominant business is banking services, it's probably a financial stock."
But you wouldn't be the first person to confuse a communications services stock with a technology stock. You wouldn't be the hundredth. For some pretty good reasons:
- Communication services is the youngest slice of the sector pie. The Global Industry Classification Standard (GICS) – a framework used by major index providers to help classify public companies – created the communication services sector in 2018.
- Communication services companies, such as Meta Platforms (which deals in social networks, artificial intelligence and virtual reality) and Alphabet (which deals in internet search, streaming video, AI, and cloud computing), have businesses that your average person might identify as "technology."
- The sector was literally created by Frankenstein-ing companies from various existing sectors. From GICS' original release: "In addition to the companies currently classified in the Telecommunication Services sector, the new Communication Services sector will include companies from the Information Technology sector that are in the business of facilitating communication, including Alphabet and Facebook, as well as media companies moved from the Consumer Discretionary sector, including Disney (Walt) and Comcast Corp."
You might reasonably ask "Why bother?" Without getting too lost in the weeds, sectors, industries and other categories exist to help us better understand which businesses are like other businesses. In turn, this helps us make useful comparisons for valuation, growth and other metrics we seek out the best stocks to buy.
And, well, over time, some lines of business evolve.
"This change reflects the fact that the way people communicate, share information and entertain themselves has significantly and fundamentally changed as a result of the rapid convergence between technology, media and telecom."
So, what does the communication services sector include? Well, business types are largely broken down into two groups:
Networks: Internet, broadband, cellular, broadcast, cable and landlines
Content: Information, advertising, entertainment, news, social media
Why do investors buy communication services stocks?
When you buy stocks within a sector, you generally expect to get a certain trait or characteristic out of it.
For example, you'd probably buy consumer staples stocks or utility stocks for a stream of steady dividends. Or you might buy financial stocks or industrial stocks in anticipation of cyclical growth. While there are always going to be exceptions to the rule – you can find growthy utilities or defensive tech stocks – most sectors have broadly defining traits.
Communication services? Well … it's all over the place.
"Over the near term, digital advertising revenue – which is the lifeblood of sector heavyweights like Meta Platforms (META) and Google-parent Alphabet (GOOGL) – is likely to stay robust as long as the U.S. consumer and broader economy remain strong," says Priyanshu Bakshi, Fidelity Sector Portfolio Manager, in his 2025 sector outlook.
Bakshi adds that the diverse sector includes "more defensive companies, such as wireless providers and broadband service providers" and tends to hold up well in times of weakness and volatility in the broad market. "Over the longer term, the sector looks to be competitively positioned as one of the key beneficiaries of AI advancements and adoption," the portfolio manager notes.
In just two paragraphs, we've covered three very different types of businesses – longstanding de facto monopolies (telcos), established cyclicals (digital ad revenues) and disruptive innovation (AI). And several sector components actually boast more than one of these business types.
Thus, the answer to the question "Why do investors buy communication services stocks?" is "It depends. Tell me which stocks they're buying."
How to find the best communication services stocks
More than any other sector, communication services mutual funds or ETFs can have a dilutive effect that runs counter to how you want to invest in the sector.
Let's say you want to invest in communication services to achieve better-than-average growth. Well, a sector index fund will be forced to hold both the growthy and defensive members of the sector, weighing down that upside potential.
If that's the case, you might be better off picking individual stocks … and at that point, your search comes down to what you want. For instance, if you're primarily concerned about yield, your screening process might end up populating established telecoms such as AT&T (T) and Verizon (VZ).
If you're more focused on the potential growth plays in the sector, however, you can start with this basic quality screen. To get to the following list of the best communication services stocks to buy, we've looked for comm-sector firms …
Within the S&P 1500: The S&P 1500 is made up of the S&P 500, S&P MidCap 400 and S&P SmallCap 600. In other words, our search will include a wide variety of large- and mid-cap stocks, as well as the market's larger small-cap stocks.
With a long-term estimated earnings-per-share growth rate of at least 15%: We're focused on the long game here, so we want to set a high bar for long-term earnings growth. And a bar of 15% should be well ahead of your average company across all sectors. (Just remember: Expectations aren't a guarantee of results.)
With at least 10 covering analysts: We'd like to look at stocks that are on Wall Street analysts' radar, which makes it likelier that there's both more reporting and more insights on these companies. The more research we have at our disposal, the more educated a decision we can make.
With a consensus Buy rating: All of the communication services stocks on our list must have an average broker recommendation of 2.5 or less within S&P Global Market Intelligence's ratings scale. S&P Global Market Intelligence converts analysts' ratings into a numerical scale. Anything with a score of 2.5 or less is considered a Buy.
