Alphabet, Meta Platforms, and Netflix have solid business models that perform well even during economic uncertainty.
Strong quarters from top communications stocks are moving the sector higher.
The communications sector is a better value than low-growth sectors like consumer staples and utilities.
A better grasp of the current tariff situation and a generally strong earnings season have helped the market rally in recent weeks, with the major indexes all recovering significantly from losses earlier this year.
Many of the exchange-traded funds (ETFs) that follow these indexes have recovered as well. The Vanguard Communications ETF (NYSEMKT: VOX) soared 9.3% in just eight trading days, from market close on April 21 to May 1.
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Top holdings in the ETF, including Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL), Meta Platforms(NASDAQ: META), and Netflix(NASDAQ: NFLX), all reported strong earnings to help lead the ETF higher. Here's why it's not too late to buy the ETF even after its recent run-up.
The company has built a bastion business model that is resistant to tariffs and supports high-margin growth and pricing power. Netflix is one of the best-performing components of the S&P 500 -- up 28% year to date at the time of this writing and hitting new all-time highs while the major indexes are still down on the year.
Meta Platforms popped 4.2% on Thursday in response to its earnings report. The company continues to grow sales and earnings at a breakneck pace. Its artificial intelligence (AI) investments are paying off by boosting engagement and advertising spending. Meta's Family of Apps (Instagram, Facebook, and WhatsApp) continues to be some of the most valuable digital real estate on the planet, attracting advertising spending despite economic uncertainty.
Alphabet also had a great report, with 12% sales growth year over year and a 20% jump in operating income for its best first quarter ever. While Netflix is a pure-play streaming business and Meta is a pure-play social media company (with some virtual reality and augmented reality projects sprinkled on top), Alphabet is a bit more complicated. Over half of its revenue comes from Google Search. But Google Cloud is also the No. 3 player in cloud computing, behind Amazon Web Services and Microsoft Cloud. Alphabet also owns YouTube, which is a highly profitable cash cow, operating system Android, self-driving company Waymo, AI division DeepMind, and more.
Despite the strong quarter, Alphabet has underperformed many of its megacap growth peers, with the stock down 14.8% year to date at the time of this writing compared to just an 8.3% decline in the Nasdaq Composite.
Communications is arguably the most unique stock market sector because it blends growth, income, and value. It includes telecommunications giants like AT&T, Verizon Communications, and T-Mobile, traditional media companies like Comcast and Warner Bros.Discovery, video game companies like Electronic Arts, Take-Two Interactive, and Roblox, newer entertainment companies like Netflix, and of course, Meta and Alphabet.
How information is shared has changed a lot over time, from a handful of broadcast networks to the rise of cable and linear networks, to streaming and social media. The communications sector reflects this shift in value, with Meta, Alphabet, and Netflix making up a combined 46.4% of the fund. These three companies alone can move the sector.
However, the rest of the sector is fairly value- and income-oriented. For example, integrated telecom services make up 10.9% of the fund. And those stocks tend to have high dividend yields and inexpensive valuations.
The Vanguard Communications ETF sports a price-to-earnings (P/E) ratio of just 18.8 and a dividend yield of 1.1%. That's dirt cheap, even compared to other stodgy, value-oriented sectors. For example, the low-growth Vanguard Utilities ETF yields 3% but has a higher P/E ratio of 20.4. Similarly, the Vanguard Consumer Staples ETF has a P/E ratio of 24.2 and a yield of 2.4%.
The communications sector offers a rare blend of growth, income, and value because many of its top holdings have lower valuations than the S&P 500. Despite their consistent free-cash-flow growth and high margins, Meta Platforms and Alphabet have P/E ratios of just 22.4 and 18, respectively, compared to the S&P 500 P/E ratio of 27.9.
A top-tier sector to buy now
The communications sector is a great buy for investors looking for growth stocks at a good value. Meta Platforms and Alphabet continue to deliver excellent results, yet both stocks are still cheap.
Telecom and traditional media companies play supporting roles in the sector, making it more value-focused than sectors like tech or consumer discretionary.
The communications sector is a perfect fit for investors who are interested in Alphabet, Meta, and Netflix but not so much in other, more expensive growth stocks. And with an expense ratio of just 0.09% and a minimum investment of $1, the Vanguard Communications ETF has low barriers to entry and won't drown you in fees.
Add it all up and communications is one of the best sectors to buy now.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Netflix, Roblox, Take-Two Interactive Software, and Warner Bros. Discovery. The Motley Fool recommends Comcast, Electronic Arts, T-Mobile US, and Verizon Communications. The Motley Fool has a disclosure policy.
