After reorganizing the inventory classification system for the whole industry, a new sector was created: communication services. It remained formed by combining the former telecommunications services sector with media stocks from the consumer discretionary sector. As well as software and internet services stocks and home entertainment software stocks from the technology sector. Communication services reproduce the growing overlap in the business models of telecommunications, media, and Internet companies.
This combination of stocks results in an industry that is much more offensive than defensive, meaning it will likely outperform the entire stock market in bull markets and underperform overall in bear markets. We believe the Internet, digital advertising, and wireless services will be key growth engines for the industry.
The Sector Remains Dominated By The Values Of The Internet And The Media
The internet and media stocks introduced to the industry significantly contribute to the market capitalization of the industry. These stocks signify some of the largest companies in the S&P 500 Index.
Advertising Is An Essential Driver For The Sector
With the integration of media and Internet actions, advertising spending, particularly online, will significantly impact the results of the sector’s activities. Even traditional telecommunications companies have become more exposed to ad spending due to acquisitions in the media space. Advertising spending tends to be directly related to the overall health of the economy. We estimate that the global digital advertising market is growing at an annual rate of 16% to 18%. The two main digital advertising formats are searched (e.g., Google) and display (e.g., Facebook, Twitter, Amazon, etc.).
New Industry Provides Exposure to Emerging Online and Mobile Trends
The formation of the communications services sector reflects the changing business models of media and telecommunications companies and the emergence of online search, social networking, and video driving subscribers away from traditional media such as magazines, newspapers, and television shows. As people devote an increasing share of their time to Internet media, advertisers have directed their advertising dollars to be online and mobile content sources. These forms of online advertising remain loosely referred to as the digital advertising market.
What Does This Mean for Investors?
Investors with diversified equity portfolios may consider allocating a portion of their portfolios to the communications services industry. Consider looking at dividend yields, interest rate sensitivity, and individual performance relative to the broader stock market. Speaking with a financial advisor can help you determine which communications services industry options are best for your investment portfolio.
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