According to Morningstar, communication services companies are those “that provide communication services using fixed-line networks or those that provide wireless access and services.” Also within the space are firms “that provide Internet services such as access, navigation and Internet related software and services.”
Among the companies running into trouble in the communications services space are a number of social media websites, the owners of traditional TV networks, and also-ran streaming services. That’s because the competition in all three of those sectors is quite intense, while traditional TV networks are also coming under pressure from cord cutting.
This list includes companies that certainly fit in these categories. However, I’d also recommend staying away from companies oriented toward video games and the metaverse, as various macro headwinds and a reversion back toward the mean (from very hyped-up levels) could send the valuations of such stocks much lower.
With all of that said, here are seven communication services stocks to sell.
The owner of Facebook has enjoyed a meteoric rise this year, with Meta (NASDAQ:META) stock soaring 165%. A combination of the company’s spending cutbacks, opportunities in artificial intelligence, and increased optimism about the U.S. economy were responsible for its surge.
But the social media company’s shares now have a forward price-earnings ratio of 26-times. I believe that this valuation largely prices in the company’s positive catalysts, especially when one considers the company faces tough competition from the likes of Roku (NASDAQ:ROKU), Snap (NYSE:SNAP), TikTok, Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) and even Amazon (NASDAQ:AMZN) for online ads.
Additionally, as I’ve noted in the past, the metaverse has been in existence for a few decades. Thus far, this sector hasn’t meaningfully impacted the lives of consumers or investors. Thus, I’m not very optimistic about the ability of the metaverse to become a positive needle mover for META stock.
For many years, I had been upbeat about Snap’s long-term outlook due to its ability to attract a high percentage of young users. But now, with the company posting dismal quarterly results even as the overall economy and advertising sector are rather strong, I think that I was probably overly optimistic about SNAP stock.
In the second quarter, Snap’s top line sank 3.6% versus the same period a year earlier, while its EBITDA, excluding certain items, fell $45.7 million to -$38.5 million. And for the current quarter, it predicted that its adjusted EBITDA would be -$50 million to -$100 million. On the top line for Q3, Snap provided guidance of a 0% to -5% year-over-year change.
Also noteworthy is that the company’s AI tool has not seemed to please Snapchat’s users, at least in the early days of its launch. According to TechCrunch, there was “a spike in negative reviews” of the app in the weeks following its launch.
Finally, like Meta, Snap faces a great deal of competition in the internet ad space, and its trailing price-sales ratio of 3.8-times is not particularly attractive.
Without a doubt, conventional TV is a contracting business, and that’s not good news for Comcast (NASDAQ:CMCSA), the owner of NBC Universal.
For evidence of how quickly conventional TV is shrinking, one needs to look no further than the performance of Disney’s (NYSE:DIS) Media and Entertainment Distribution unit, which is dominated by its conventional TV networks.
The unit’s revenue rose an anemic 3% versus the same quarter a year earlier, while its operating income sank 42% year-over-year. Additionally, Disney’s apparent desire to sell all or part of its conventional TV networks is indicative of how little growth and value conventional TV has at this point.
Meanwhile, competition is mounting for Comcast’s internet service provider business, as Verizon (NYSE:VZ) has entered the sector with very low selling prices and Starlink is becoming more popular.
Given all of these factors, CMCSA stock definitely belongs on this list of communication services stocks to sell.
Warner Bros. Discovery (WBD)
Like Comcast, Warner Bros. Discovery (NASDAQ:WBD) owns conventional TV networks in the form of many cable channels that are being undermined by the cord-cutting phenomenon. In the first quarter, the company’s revenue plunged 10% versus the same period a year earlier. This hasn’t been helped by the company’s also-ran streaming service that’s only poised to enter the black this year. Additionally, over the medium-term, the financial performance of the company’s assets are likely to be significantly hurt by the Hollywood strikes.
What’s more – at a time when movie box office receipts remain well below 2019 levels, Warner Bros.’ movie studio will be far from an outperforming asset overall. Yes, its Barbie movie will generate a significant amount of profits for the company in the short-term. However, that one hit is not going to prevent the movie studio from losing money over the long-term.
To top it all off, Warner Bros. Discovery’s balance sheet needs some work. The company currently has $46.4 billion of net debt. That’s a great deal of debt with which the company (and investors) have to contend with.
At a time when the economy is thriving and a high percentage of Americans are enjoying vacations and reveling in visiting nightclubs, theme parks, and restaurants, the video game sector (in my view) is not the best space in which to invest. That’s because, of course, consumers are spending so much of their days on real-world activities, leaving little time for video games.
Given these points, I recommend selling Roblox (NASDAQ:RBLX) stock now.
Valuation is certainly another factor in this recommendation, as RBLX stock has a huge trailing price-sales ratio of 10-times. Wall Street appears to be betting that the company’s metaverse-oriented games will explode in popularity, but I’m not so sure.
Indeed, as I noted in the Meta section of this column, the metaverse has been around for decades and has never amounted to much, either in terms of popularity or revenue. The same arguments I levied against Meta apply here.
Notably, Roblox is still a long way from entering the black. Analysts, on average, expect its loss per share to come in at $1.76 this year and $1.65 in 2024. Those aren’t numbers long-term investors want to see, and this stock remains a sell in my books.
Electronic Arts (EA)
Electronic Arts (NASDAQ:EA) is in a similar boat as Roblox. Specifically, with Americans spending a great deal of their time splurging on fun outdoors activities, I don’t think they’re devoting a great deal of their days or budgets to video games. And of course, that does not bode well for Electronic Arts or for EA stock.
Supporting my theory, analysts on average, expect the company’s top line to climb only 3.6% this year, while the average estimate calls for earnings per share of $7.71, versus this year’s average estimate of $6.87. In other words, the company’s top and bottom lines are not exactly growing at a frenetic pace.
Further, EA’s valuation is nothing to write home about, as its forward price-earnings ratio is 20-times, which is slightly above average. For those looking for growth, there are better places to find it right now.
Frontier Communications Parent (FYBR)
Frontier Communications Parent (NASDAQ:FYBR) provides cable TV and internet connectivity. Like a few of the other companies on this list, Frontier is clearly being hurt by both the cord-cutting phenomenon and increased competition in the internet services provider space.
In the latter sector, competition from Verizon’s low-priced offering launched in 2022 hurts this company’s long-term outlook. Additionally, the popularity of Elon Musk’s Spacelink continues to grow. Moreover, as new technologies proliferate and become more affordable, expect many other firms to also start competing with Frontier, dragging down FYBR stock in the process.
Supporting my thesis, analysts expect FYBR to generate a loss of 4 cents per share next year, down from a profit of 3 cents per share in 2023.
On the date of publication, Larry Ramer did not hold (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.