Communications Services Earnings Preview: Streaming Wars, Social Media, And 5G

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Still relatively new to the S&P 500 sector lineup, Communications Services ("Comms") looks to be a steady hand in an uncertain environment as some of the biggest names in the sector prepare to open their Q3 books. As with pretty much all things in the investment arena, there are caveats and big "ifs." For comms, one of them is consumer spending—with a dose of consumer sentiment mixed in. Why? Because some of the components of the Communications Services sector rely heavily on users to keep their wallets relatively wide open as former traditional telecom companies transform into communications juggernauts.
Coupled with a handful of former Consumer Discretionary and Technology components, the Communications Services sector also could have a pulse on the economy overall. To that end, note in figure 1 below how closely the Comms sector has tracked the broader S&P 500 Index (SPX).
MATCHED SET. Over the past quarter, the Communications Services sector ($IXC - candlestick) has moved in relative lockstep with the S&P 500 Index (SPX - purple line), perhaps an indication of how closely aligned the sector is to consumer spending and
thinkorswim All Eyes on the Consumer The good news is that both consumer spending and sentiment have been high, but they seem to be losing some of their oomph. Consumer sentiment, as tracked by the University of Michigan, posted a small uptick throughout September, but “show(s) signs of erosion,” according to the most recent Surveys of Consumers report.
“Despite the high levels of confidence, consumers have also expressed rising levels of economic uncertainty,” Chief Economist Richard Curtin wrote. “Some of these concerns are rooted in partisanship, some due to conditions in the global economy (Brexit, Iran, Saudi Arabia, China), and some are tied to domestic economic policies.
“These and other policy concerns have so far been held in check by positive finances, although fewer consumers now anticipate higher wages or lower rates of unemployment in the year ahead,” Curtin added.
Another data point that seems to support this rising uncertainty is the recent Investor Movement Index® (IMX SM ), TD Ameritrade’s proprietary, behavior-based index, which aggregates Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets.
According to September IMX data, TD Ameritrade clients were net sellers of equities—including a couple big Comms names: Facebook (FB) and Netflix (NFLX) —and were net buyers of bonds.
Streaming War Heats Up Also batting at the sector’s door is competition between components that's been ebbing and flowing along with changing consumer wants and desires. Netflix (NFLX) might offer an example of how consumers’ willingness to quickly jump to other platforms could impact the fortunes of a popular service.
Long the leader of video-streaming products and a go-to favorite for cord cutters, NFLX surprised Wall Street in Q2 with disappointing gains in memberships, particularly among U.S. users. To be sure, there were still gains—2.7 million new subscribers—but the slowdown was remarkable compared with 5.5 million the company reported in last year’s Q2 and notably below the 5.0 million the company had projected.
Many, including NFLX Chief Executive Reed Hastings, took that as a sign of the pain the so-called streaming wars is already inflicting as Walt Disney Co. (DIS) and Apple (AAPL) prepare to enter the market next month.
“While we’ve been competing with many people in the last decade, it’s a whole new world starting in November,” Hastings reportedly said at the recent Royal Television Society conference, according to Barron’s. “It’ll be tough competition.”
That struggle also comes at a time when creating content is getting pricier, putting dents in earnings per share amid higher operating costs.
Where’s the 5G? Many analysts said they will be listening for updates on the state of 5G mobile networks, the next technological generation of connections that promise higher speeds and lower latency, which is the lag time, to vastly improve streaming experiences.
Verizon (VZ) , Sprint (S) , AT&T (T) and T-Mobile (TMUS) have been rolling out 5G in selected areas in choice cities for most of this year, with a ramp up this summer and fall. Analysts said they'll want to know how the implementation has been proceeding and what the expectations are going forward. There appears to be a lot of investor interest in this next generation.
But you might not want to spend too much time thinking about the hype: 5G has a ways to go before it dominates the planet. Regulatory issues remain among the top potential headwinds, as both the Federal Communications Commission (FCC) and a number of state and local government agencies scrutinize the public health effects before giving the green light to widespread deployment.
In a letter addressing Congress’s concerns about radio frequency issues, FCC Commissioner Ajit Pai noted last spring that...