The onset of Q3 earnings reporting is just around the corner, and the Communications Sector (NYSEARCA: XLC) is expected to lead with growth. The sector was the 2nd strongest growing in Q2 and outperformed by 650 basis points, so there is a high expectation for strong results this quarter.
The risk is that the consensus estimate reported by FactSet for Q3 is rising, so the bar could be set high; the question is which companies are expected to post the most robust results and have the most to offer for investors.
The makeup of the S&P 500 Communications Services Sector is important to this discussion because the largest holdings are doing most of the heavy lifting. The #1 holding is Meta Platforms (NASDAQ: META), which is surprising, given its nearly 25% allocation, and it is expected to post the most robust earnings growth. The #2 holding is Alphabet (NASDAQ: GOOG), including positions in Class A and Class C shares for about 22%; also expected to produce growth. The 3rd largest holding is Charter Communications (NASDAQ: CHTR), which is also growing but is less than 5% of the “sector.” Fully half the sector is not expected to grow earnings at all.
Meta Platforms Reinvigorates Growth
Meta Platforms reinvigorated growth and made significant headway with margin improvement since January 2023, and the market is noticing. Meta is ranked among Marketbeat’s Most Followed Stocks, Most Upgraded Stocks, and Highest Rated Stocks due to its rapidly improving performance.
That improvement has led to a 20% increase in the quarterly EPS target, a target that is more than 100% above the prior year's figure. This puts Meta in the lead regarding growth and the strength of revisions. The risk is that the bar is set high, and Meta results may not produce a catalyst for the market.
The analysts see Meta moving significantly higher over the next few quarters. The Marketbeat.com consensus share price target implies a 7% upside, with shares trading near $300, but the analysts have made such sharp revisions that the consensus lags behind true sentiment.
Only 1 revised target has been set below or even near the consensus figure since late April. The consensus of targets set since April has Meta trading closer to $380, which is another 19% above the broad consensus, and many targets are above $400.
Alphabet Upgrades Lag The Sector
Alphabet is expected to post robust growth in Q3, and the analysts have been revising their EPS estimates higher, but the upgrades lag behind the sector. Alphabet’s consensus EPS target is up 35% compared to last year but has only increased by 8% since the start of the quarter.
The takeaway for investors is that revenue is expected at record levels, and margin strength should be present. The company’s Q2 results were underpinned by Other Bets and Cloud, which grew at a near-25% pace. The race for AI is based in the cloud and should continue to drive solid results this year.
Google is ranked among Marketbeat.com’s Highest Rated Stocks and carries a consensus Buy rating. However, the analysts see the stock as fairly valued near recent price action, so upside potential may be limited.
Netflix has Significant Upward Revisions to EPS Estimates
Netflix (NASDAQ: NFLX) is the 10th largest holding in the XLC index and ETF and among the stocks with the largest EPS revisions. Analysts have increased their consensus estimate by more than 10% since the start of the quarter and expect 7.6% top-line growth with margin expansion. Cost crackdowns and price increases will drive margin expansion and may exceed expectations. The risk is the impact of the Writers Guild strike, which is yet to be seen, and the delayed impact of the new ad tiers.
Analysts are bullish on Netflix stock price. The consensus Moderate Buy rating is up from Hold compared to last year, and the price target is trending solidly higher. The consensus of $430 is about 12% above the current action, and most new targets are above that. Assuming the company delivers another solid report, the consensus estimate should continue trending higher and lead the market to follow.