Of the 11 sectors in the S&P 500, communication services stocks have delivered the most robust performance year-to-date, up 15.32%, thanks, in part, to these top-performing communication services stocks.
The S&P 500 communications sector consists of many well-known businesses operating in the telecom industry, such as social media, video streaming, video games, advertising, concert promoters, etc.
At the end of December, Morningstar.com suggested that the digital advertising growth experienced by companies in this sector in 2023 would not repeat itself in 2024. Its top three communication services picks were Verizon (NYSE:VZ), Walt Disney (NYSE:DIS), and Comcast (NYSE:CMCSA).
These three companies average a YTD gain of 12%, with Disney leading the way, up more than 32%.
Who are the communication services stocks with more room to run? Disney should be at the top of your list. I’d be less inclined to suggest the other two.
There are 22 S&P 500 companies in the communication services sector. Excluding the three above, I have 19 choices. The ones that make the cut are up at least 20% in 2024.
Meta Platforms (META)
Meta Platforms (NASDAQ:META) has the best performance of the 22 names in the sector. Its shares are up 41% YTD, close to four times the index’s 11% return. Over the past year, the stock has gained 144%.
I saw a Motley Fool article from March 25 that wondered if Reddit (NYSE:RDDT) could become the next Meta. Anything is possible. Reddit’s shares have exploded since going public on March 21. The social media platform’s shares were priced at $34. They’re up by roughly 70% in the week since.
There are two key differences.
First, Reddit doesn’t make money. In the last two fiscal years, it lost $249 million combined on $1.47 billion in revenue. When Meta went public in May 2012, it was called Facebook and was profitable, generating a 2011 operating profit of $1.70 billion on $3.71 billion in revenue.
Second, Facebook/Meta had 526 million DAUs (daily active users) when it went public. That compares to 73 million DAUq (daily active unique users) for Reddit. They’re not in the same ballpark.
Meta has made the cuts necessary to its overhead to keep its free cash flow flowing. After losing its focus on the metaverse, it is back on track.
Walt Disney (DIS)
I said I would exclude Walt Disney from the selection process. However, it and my two other names are the only ones to gain more than 20% in 2024, so it’s back in.
DIS stock is up 35% YTD and 29% over the past year. Thanks to its strong performance in 2024, its shares delivered a positive cumulative return of 10% over the past five years.
Welcome back, Mickey.
CEO Bob Iger still has much to fix or get right in the next 12-24 months. Most pressing is the impending proxy fight with activist investor Nelson Peltz and his investment firm, Trian Partners.
Institutional Shareholder Services, a prominent shareholder advisory firm, recently recommended its institutional clients vote for Peltz to join Disney’s board. However, in an interesting twist, it recommended clients say no to Jay Rasulo, Disney’s former CFO.
Disney and Iger have the support of Roy and Walt Disney’s families, along with Star Wars creator George Lucas.
In the meantime, Barclays analyst Kannan Venkateshwar recently upgraded Disney stock to Overweight from Equal Weight and boosted his target price from $95 to $135, roughly 10% higher than where it’s currently trading.
The analyst believes that Disney streaming services could break even as early as Q2 2024, two quarters ahead of company guidance. If that happens, $200 could be in play if the markets are still humming.
Netflix (NFLX)
Netflix (NASDAQ:NFLX) has the third-best performance of the 22 names in the sector. Its shares are up 30% YTD and 88% over the past year.
While Disney is working to break even on its streaming services, the industry leader had a strong 2023. The company finished the year with 260.28 million global paid memberships, up 12.8% from 2022, a company record.
Other positives in 2023 included a 21% operating margin, 300 basis points higher than 2022 and 100 basis points higher than management’s expectations, while it continues to work on monetizing its ads business and increasing the paid sharing of its members. It wants to get to 500 million connected TV households in the future.
In 2024, it expects to generate an operating margin of 24%, up from its previous guidance of 22.5% at the midpoint. That should help boost its free cash flow. In addition, it expects double-digit revenue growth in 2024, excluding currency, while ads should help with revenue growth in 2025 and beyond.
“While establishing ourselves in new areas like advertising and games, we believe we have a lot more room to grow,” the company stated in its 2023 shareholder letter.
“It’s a $600B+ opportunity revenue market across pay TV, film, games and branded advertising — and today Netflix accounts for only roughly 5% of that addressable market. And our share of TV viewing is still less than 10% in every country.”
Its stock’s not cheap, but you have to pay for the best in the business.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
