Communications Services: Riding Structural Growth While Avoiding Cyclical Traps

The Communications Services sector finds itself at a crossroads. Over the past year, it has posted respectable returns—7.3% over six months and 20.9% over 12—but these gains mask a stark divergence in performance between companies. While some firms are capitalizing on secular trends like AI-driven content and subscription growth, others are struggling under cyclical headwinds, debt burdens, and regulatory risks. Meanwhile, macroeconomic rotations into industrials and materials sectors, fueled by tariff policy uncertainty, have further complicated the outlook. Investors must now parse this fragmentation to identify opportunities in structural winners while avoiding cyclical traps.

The Macro Backdrop: Rotations and Tariff Turbulence

The sector's recent underperformance relative to industrials and materials is partly a reflection of broader market rotations. . While industrials and materials initially lagged due to tariff-induced supply chain disruptions, recent policy clarity (or at least pauses) has emboldened investors to bet on cyclical recovery. For instance, the U.S. aluminum and steel tariffs, now at 25–50%, have reshaped trade flows, benefiting domestic manufacturers but creating volatility for Communications Services firms reliant on global supply chains.

However, this rotation isn't a straightforward sell-off of Communications Services. Instead, it reflects a growing recognition that the sector's growth is unevenly distributed.

Internal Divergences: Winners and Losers Defined by Strategy

The sector's performance hinges on two axes: structural secular growth (e.g., AI, streaming, subscription models) and cyclical exposure (e.g., debt-heavy telecoms, ad-dependent media). Let's dissect recent examples:

Case 1: AMC Networks – Streaming as a Lifeline

AMC Networks (AMCX) exemplifies the shift toward subscription-driven revenue. Its streaming platform, AMC+, has gained 4.2 million subscribers since Q3 2024, partly funded by its sale of AMC Theatres' debt-laden cinema chain. This separation allowed AMC Networks to focus on high-margin content, such as its hit series The Bear. . The stock has outperformed the sector by 15% over 12 months, a testament to its strategic pivot.

Case 2: News Corp – Navigating Ad Revenues with Discipline

News Corp (NWS) offers another success story. Despite headwinds in digital advertising, its print divisions (e.g., The Wall Street Journal) and education arm (Smart Sparrow) delivered a 9% revenue beat in Q1 2025. The company's focus on profitability over growth—its EBITDA margin expanded by 200 basis points—has insulated it from sector-wide ad spend volatility.

Case 3: Cellnex Telecom – The Cyclical Risk

In contrast, Cellnex Telecom (CNXV), a European tower operator, underscores the perils of overexposure to economic cycles. Its valuation has fallen 25% since Q4 2024 as investors price in risks from rising interest rates and slower 5G rollout spending. . While its dividend remains robust, its leveraged balance sheet (net debt/EBITDA of 4.5x) leaves it vulnerable to a slowdown in telecom capex.

Structural Growth vs. Cyclical Sensitivity: A Framework for Investors

The sector's bifurcation demands a nuanced approach. Here's how to navigate it:

1. Embrace Content-Driven Subscriptions
   Firms like AMC Networks, Discovery (DISCA), and Discovery's Eurosport Player are building defensible moats through exclusive content. . These companies are less tied to advertising cycles and more insulated from macro shocks.

2. Avoid Leveraged Telecom Plays
   Cellnex and other tower operators, while essential, face valuation headwinds. Similarly, legacy telecoms like AT&T (T) and Verizon (VZ) are grappling with slow broadband adoption and rising interest costs. Their dividends, while stable, offer little upside in a rising-rate environment.

3. Monitor Regulatory Risks
   Meta (META) and Alphabet (GOOGL) remain sector titans, but their dominance invites antitrust scrutiny. Investors should favor firms with diversified revenue streams, like News Corp, over single-product tech giants.

Conclusion: Selectivity Is Key

The Communications Services sector isn't dying—it's evolving. Investors should prioritize companies like AMC Networks and News Corp, which are retooling for secular growth, while avoiding cyclical laggards like Cellnex. The sector's trailing 12-month return of 20.9% still outpaces broader markets, but this outperformance will increasingly depend on navigating its internal fractures.

Investment Thesis:
- Long: AMC Networks (AMCX), News Corp (NWS), and smaller content-focused players like Lionsgate (LGF.A).
- Avoid: Cellnex Telecom (CNXV), AT&T (T), and leveraged telecom infrastructure firms.

The Communications Services sector is no longer a monolith. Its future belongs to those who can separate the streaming innovators from the cyclical relics.