How do you define it? Will it be able to continue its momentum? Yes… and no. Communications services are a curious mix of growth-oriented tech-related companies and old telecom companies. A very heterogeneous sector.
For a long time, however, this was limited to telecom companies, which were characterised by defensive values, strict regulation and slow growth. Large, stable and unattractive companies! Take companies like Proximus or the Dutch telephone operator KPN. Since 2000, telecoms have led global stocks 10 times out of 11 during market declines of at least 10%. However, a good defence does not guarantee a good attack. These stocks have lagged 10 times out of 11 during rebounds.
Orange to connect the entire Paris Olympics: a world first
In 2018, the S&P 500 and MSCI indices restructured the communications services sector by mixing some tech giants with defensive telecom stocks. Telephone operators were replaced by search engines, social networks and e-commerce companies that are experiencing growth close to tech. While the old telecom companies are still there, they now represent only 18% of the sector’s capitalization.
The communications sphere is now dominated by interactive media and services (61%). The majority of its companies are American (99%) with big names like Meta and Google’s parent company, Alphabet. Only one of these companies comes from the eurozone. But the sector also includes dating apps, recruitment sites… in other words, companies with less restrictive barriers to entry than telecoms which require a vast network of infrastructures.
Entertainment, made up of large streaming platforms and video game companies, represents 14% of the capitalization of communication services. Who are the remaining 7%? Media, including cable television providers, television channels, advertising agencies.
Thus, a large part of the companies in this sector adopt characteristics of tech: low dividends, comfortable gross operating margins, massive reinvestment of profits in innovation, launch of new offers with great fanfare and… spectacular growth.
These characteristics have pushed the sector’s returns to 21.8% in 2024 and those of interactive media and services to 30.4%, even outperforming technology (+25.4%), global equities (+14.8%) and entertainment (also up 14.8%). Here again, telecom companies are behind.
This disconnect is nothing new. Since the 2022 trough, global communications services have soared (49.3%) and led global equities (41.9%). Interactive media and services have soared (85.6%) to outpace tech (82.9%). Entertainment, meanwhile, has mirrored global equities, with returns as high as 42.1%. But mobile telecoms have gained 19.3% while traditional diversified telecoms have stagnated.
On the stock market, a whiff of correction in the heart of summer: “But it should only be temporary”
After two years of cost cutting, large technology-related communications companies are expected to continue to climb on the back of a corporate offensive. Their high gross operating margins, particularly those of media and interactive services (64%), allow them to self-finance their expansion and thus reassure investors.
Communications services stocks make up just 4.4% of the eurozone’s market cap, most of which are former telecoms companies. There are just 0.1% of media and interactive services companies, and 0.6% of these are entertainment companies. So look to the US for these sectors. Also look to Japan, Singapore, or the Netherlands, which also have entertainment companies. Add these tech stocks to your portfolio now, and watch as these stocks drive this bull market even higher.
