The communications sector has undergone a transformation in recent times and now spans a broad smattering of companies from other sectors, from technology to telecom and consumer discretionary.
The composition of the S&P 500 communication services sector underwent a significant revision in September. The sector is now composed of names that provide plumbing for data and content transmission, such as cable giants, as well as companies that provide content for such outfits. Examples of the latter include Netflix Inc. (NFLX) and Walt Disney Inc. (DIS).
For the most part, stock movements for these companies rose and fell with the markets. While stocks for communication services companies had an exuberant start to this year, total returns for the sector are down by 5.6% from the beginning of 2018. Growth in international markets, such as China and India, and traction from advertisers were significant contributors to the price increases. But there are still major questions to be answered regarding future growth, regulation and cyber-security prominent among them.
For example, Sundar Pichai - CEO of Alphabet Inc. (GOOGL) - Google’s parent company - was recently called for a Congressional hearing to answer questions relating to political bias in Google’s search results.
- TripAdvisor Inc. (TRIP)
Price Increase: 81.5%
Market Capitalization: $7.1 billion
- Twitter Inc. (TWTR)
Price Increase: 51%
Market Capitalization: $20 billion
- Netflix Inc. (NFLX)
Price Increase: 43.2%
Market Capitalization: $101.9 billion
- 21st Century Fox (FOXA)
Price Increase: 42.3%
Market Capitalization: $85.7 billion
- Discovery Communications (DISCA)
Price Increase: 26.8%
Market Capitalization: $18.2 billion
Travel research company TripAdvisor was the year’s star performer and turnaround story in this sector. Up until last year, the company’s efforts to generate profits seemed to be tinged with losses from other parts of its business. For example, even as engagement metrics and traffic to its site multiplied, the company’s net income dropped. Its instant booking feature failed and booking revenues declined by 21% in its aftermath. But the Needham, MA-based company stanched losses and increased revenues this year.
In its latest earnings call in October, TripAdvisor zipped past analyst estimates for its earnings and reported only 2% decline in its hotel booking revenue. Significantly, the company’s non-hotel segment revenue increased, thereby reducing its reliance on third-party sites like Booking.com for revenue from hotel bookings.
Analysts have pointed out that the company needs to ramp up its advertising spend in order to stay ahead of competition. During its latest earnings call, TripAdvisor’s CFO Ernst J. Teunissen said the company intends to ramp up its spending on television ads in 2019 and focus on advertising on other services, beyond hotel booking, offered on its site.
When the President of the most powerful country on earth uses your platform as his megaphone, then your platform is bound to increase in value. Twitter’s business was struggling until Donald Trump won the 2016 Presidential election.
Since then, the San Francisco-based company has seen an influx of users and advertisers to its platform. Twitter has become a tool for international diplomacy and policy discussions. With impressive gains of 51% in its price from the start of this year, the social media platform is the second-best performing communications stock. It consolidated gains from last year and reached a peak of $46.65 in July. On the product front, it rolled out changes in ordering of tweets on its platform as well as a slew of product updates. CEO Jack Dorsey said Twitter has formed an “Influencer Council” to service advertiser accounts.
During its latest quarter, the company reported an increase in engagement and revenues. There was a 9% increase in daily usage of the platform while revenues increased 29% from the same period a year ago. Advertisers, attracted to the prospect of micro-targeting a growing user base, flocked to the platform.
But online abuse and bullying remains a thorn in Twitter’s ascent. Its stock crashed by more than 11% in a day last week after Amnesty International released a report that declared the company was an abuser of human rights. According to CFO Ned Segal, health of the Twitter platform was the topmost priority in 2019 for the company.
Netflix’s stock rode a wave of growth in its international business this year. The company beat analyst expectations for earnings per share in all quarters and its stock rose by 43.2% in 2018. It is the year’s third-best performer in the communications sector.
Two factors especially contributed to the boost in Netflix’s stock price. The first one was its performance in international markets, especially India, where it has begun producing hit shows in local languages. Netflix’s user base in international markets rose to 137 million this year from 93.80 million at the end of last year. Revenues during its third quarter jumped 36% as compared to the same period in 2017 thanks to higher profit margins in the United States due to a price hike.
But there might be challenging times ahead. The streaming services market within the United States is becoming increasingly crowded. Disney, which will launch a service next year, is the biggest threat with its massive library of content and enormous reach. Netflix also continues to burn cash at a prolific rate, thanks to significant upfront costs related to marketing and content for its product. The company does not intend to pull back on raising debt next year and has forecast negative cash flow of negative $3 billion, the same as this year and the previous one, for 2019.
21st Century Fox Class A
21st Century Fox’s shares gained 42.3% this year. But that statistic does not fully capture the 92.5% run up in its price since last November. The gains have mainly been driven by Walt Disney Co.’s (DIS) acquisition of the entertainment conglomerate’s film and studio business. The success of Deadpool 2 – the fifth biggest film this year – also helped its studio division to swing to an operating profit of $289 million this year. The company’s domestic network affiliate fee revenues also increased by 11% this year.
The Disney acquisition, which was approved this July, streamlines Fox’s operations. Disney will gain control of Fox’s studio and television business. The remaining part of its business, which will be christened New Fox and includes its lucrative cable and sports channels, will remain under Fox’s control. James Murdoch, CEO of 21st Century Fox, said the new entity’s news and live sport brands will “underpin the strategic strength and robust financial profile.”
Discovery communications has been in a free fall from its peak price of $43.72 in 2014 amid a general bearishness for stocks threatened by cord-cutting millennials. It rose by 26.8% in its price this year even as the price for rival Charter Communications has floundered.
Analysts ascribe the rise in its stock price to the cable TV empire builder John Malone’s increase in stock holdings for the company. The Silver Spring, Maryland – headquartered company is a provider of “unscripted content” networks, such as Animal Planet and HGTV. Investors also see promise in Discovery’s acquisition of competitor Scripps Network this year.
A successful merging of operations would expand its reach and introduce economies of scale for advertisers. The network already claims that a quarter of its target demographic is women. Even as it ramps up operations, some say that Discovery itself could become an acquisition target as the cord-cutting revolution becomes more pronounced.