State Street SPDR ETFs: AI-exposure with the defensive attributes of telecom operations

State Street SPDR ETFs: AI-exposure with the defensive attributes of telecom operations

19 oktober 2023

Aandelen Technologie
Apps - Social Media.jpg

The Communication Services sector provides some answers for today’s market challenges. The mega cap stocks of Meta and Alphabet have been the predominant drivers of performance for the sector this year.

However, combining telecom services and media/entertainment to the mega cap mainstay of digital advertising revenue provides some balance and recurring revenue models in challenging economic environments. The sector has a relatively high sensitivity to rising inflation. Leading companies have demonstrated an ability to hike prices on services to consumers to maintain profit margins.

Rebecca Chesworth, Senior Equity ETF Strategist:

'Telecommunication services generate steady revenue streams from subscriptions such as wireless plans, broadband, and cable TV packages. Such services are often viewed as necessities by consumers. High switching costs and service disruptions deter customers from switching providers. Also, government oversight and regulations can act to limit extreme price competition. Such factors give a defensiveness to earnings.  In a post-COVID world and one of AI-driven enhancements, consumers are more aware of the importance of connectivity and may be willing to upgrade earlier. 5G offers and fibre are helping spur demand for fixed broadband, where previously mobile-only was becoming a feature.'

All about the technology

Changes in customer behaviour during the COVID crisis accelerated digital transformation for communication services companies, bringing new means of communication (chats, collaboration, video calls) and customer support channels. Today, technological change is highly relevant in the application of AI, virtual and augmented reality within gaming and viewing live events, and enhanced capabilities for streaming and digital advertising.

5G technology provides faster broadband speeds and lower latency, allowing businesses and retail consumers to access information and high quality entertainment more quickly. It is important for development of the Internet of Things, allowing links between multiple smart devices. Building out 5G networks and access has involved considerable investment by telecom operators, which has depressed returns, but should provide growth in the future.

The implications of AI are significant for this sector. Alphabet is one of the undisputed leaders here, from the importance of Google Cloud, the large language model Bard, and research front-runner DeepMind. However, the use of foundation models could threaten the predominance of Google search, making this an interesting space to watch.

Elsewhere in the sector, stocks like Netflix and Comcast are good examples of how machine learning can be used to analyse subscriber data and viewing habits to provide a better experience for customers. As the latter says of its VideoAI, 'it’s binge-watching as an applied science'.

Gerelateerde berichten