Communication services sector

Priyanshu Bakshi is portfolio manager of Fidelity Advisor^® Communication Services Fund.

Communication services stocks advanced strongly in 2025. Propelled by enthusiasm about the acceleration of artificial intelligence development, valuations for companies perceived to be the biggest potential winners of the AI race soared.

Despite high equity market volatility during 2025, the business fundamentals for many major communication services companies were strong. The adoption of generative AI technologies is in the process of transforming customer service and digital advertising, and improving profitability and efficiency, for numerous companies. These factors contributed to positive investor sentiment for the sector during the past year.

2025: Mega-cap firms anchor the sector’s performance

The communication services sector delivered an outsized gain relative to the broader U.S. equity market in 2025. Through November 30, communication services stocks advanced about 24%, versus roughly 18% for the broad-based S&P 500^® index.

That said, it was a year marked by elevated market volatility. In mid-February, especially, the sector pulled back, in line with the broader equity market, in part due to investor concern about the impact of the Trump administration’s shift in trade policy and the institution of tariffs.

Amid this environment, investors briefly shifted their focus away from higher-growth areas of the market in favor of defensive-oriented sectors. This downtrend for high-growth communication services stocks continued through early April, when the equity market sharply reversed course and growthier stocks rebounded strongly through November.

For the year, the biggest winners in the sector were those with the most exposure to AI. Specifically, strong performance from mega-cap firms such as Alphabet, the parent company of Google, and social media giant Meta Platforms anchored the sector’s results. Conversely, cable and telecommunication services companies delivered some of the weakest results. With little to no exposure to the AI boom, these companies—including Comcast, Charter Communications, Verizon Communications, AT&T and T-Mobile—were largely left behind in 2025.
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Year-to-date price return

2026 outlook: Ongoing AI investment, working toward greater monetization

The evolution of AI is expected to remain the most important driver of growth for the communication services sector in 2026. Companies across a wide range of sector industries are investing heavily, vying to secure their positions as leaders in AI integration.

Companies with the largest digital footprints—including Alphabet and Meta—are not only spending the most on research and development but are succeeding in getting customers from their massive user bases to adopt their AI applications. I expect these companies to continue leadership in AI as 2026 but acknowledge that the quick pace of innovation is making room for new entrants that could disrupt the sector with unique use cases and applications.

Despite massive spending in AI over the past three years, companies within the communication services sector are working diligently to monetize their AI models to show they can drive revenue growth. In my view, we have yet to witness the full impact of these investments—and I believe the market could be underestimating the long-term positive impact of this technology.

The use of AI on communication services companies’ platforms is also enabling innovation across other industries, including increased user engagement on digital platforms, as well as hyper-personalized advertising. Given the reach of the social media platforms with their billions of users, companies are eager to invest in digital advertising, which AI is making ever-more targeted. We are still in the early innings of this advertising revolution, but the prospects for increased revenue generation are considerable, in my opinion.

Conviction in gaming companies

One investment area that I believe is particularly compelling—and that I think embodies the primary growth drivers for the sector—is gaming. Before AI, the development of video games would require large teams of specialists, taking anywhere from several months to several years from concept to finished product. Today, AI is transforming the development and quality of these games, enhancing design, and offering more personalized player experiences.

For example, AI is a key component of Roblox’s video game offerings. With more than 85 million daily users, the company provides video game creators with an end-to-end platform, as well as services and support, to help them build immersive experiences. Roblox also uses AI to moderate content and power a safety feature to determine the age of users on its platforms. These are just some of the ways the business has integrated AI to drive its value proposition, which, in turn, is attracting more users and driving free-cash-flow generation for the company.
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Growth of video game users

DAUs

Take-Two Interactive is another company that, in my opinion, is leveraging AI very well. With its global audience across consoles, PCs, and mobile devices, it has developed tools to improve the quality of its games to create a more-immersive experience for its players, moving toward increasingly realistic game play for its blockbuster franchises, which include Grand Theft Auto. With the benefit of AI, the games’ non-player characters can exhibit enhanced reactions, environmental awareness, and personalized interactions, all of which can create a more dynamic and realistic in-game experience—and which could be powerful drivers of sales growth.

Driving innovation with AI

Looking ahead, I am optimistic about the prospects for continued growth in the communication services sector. Companies within the sector are at the heart of driving innovation with AI, the single most powerful growth driver in the market today. As companies continue to spend heavily on development and integration, communication services firms with exposure to this technology appear poised to be the sector’s biggest winners over the long term.