What does "Communications" Mean, These Days?

Words have meaning, so changes in words also can have meaning. Consider the “communications” segment of the Standard and Poors 500 index.

The "communications" sector of the S&P 500 includes companies involved in advertising, media, internet services, and telecommunications. Each of those segments operates in different parts of the internet ecosystem, with distinct roles and valuation profiles. Lumping them all together might obscure more than it reveals. 

The firms tracked as part of the S&P 500 “communications index include: 

1. Alphabet Inc. Class A (GOOGL)

2. Alphabet Inc. Class C (GOOG)

3. AT&T Inc. (T)

4. Charter Communications Inc. Class A (CHTR)

5. Comcast Corporation Class A (CMCSA)

6. DISH Network Corporation Class A (DISH)

7. Meta (META)

8. Netflix Inc. (NFLX)

9. Omnicom Group Inc. (OMC)

10. The Interpublic Group of Companies Inc. (IPG)

11. Twitter Inc. (TWTR)

12. Verizon Communications Inc. (VZ)

13. Walt Disney Company (DIS)

I don’t know about you, but I evaluate asset-light advertising firms quite differently from capital-intensive connectivity firms, and media content owners different from both those other segments. Likewise, I would not consider Alphabet, Twitter and Meta in the same category as advertising, connectivity or content ownership firms. And even if other firms in the index have some streaming exposure, they are not pure-play streamers like Netflix. 

The point is that knowing how the firms in the index have performed financially does not really tell you much about how each of the sectors performed; what their growth rates are or how they should be valued relative to their “peers.” 

Charter, Comcast, Verizon, Dish and AT&T are in one valuation range. Alphabet, Meta, Twitter are in another range. Mobile firms recently have featured EBITDA multiples in the seven range. 

Advertising and marketing firms have had multiples in the 10.6 range. Cable TV companies have been valued at about 7.5 multiples. “Integrated telecommunications services: have a 6.8 multiple. “Online services” garner a multiple of 15.9. 

It does not necessarily illuminate our understanding that firms with such disparate multiples are considered to be in a single index. 

By some estimates, The average P/E ratio for U.S. telcos  was around 20 as of 2021.Online services provider average P/E ratio was around 50 in 2021. By other estimates the ratios were lower. 

Using TTM/GAAP metrics, Verizon’s early 2023 P/E ratio was about 7.7. Comcast in the same period had a 31 P/E while Charter had a 12 ratio. Netflix had a 35 P/E ratio. Alphabet and Meta had ratios close to 20. 

Omnicom had a ratio of about 14.4. Disney, meanwhile, traded at about 55 times earnings. Netflix traded at 34.7 times earnings. 

To be sure, ratios are affected by firm size, growth rates, firm efficiency, debt loads and investor sentiment. 

But you get the point: S&P assembles a single index including firms with wildly-different earnings or price ratios, producing an “average” performance index that might actually obscure more than it reveals.