Communications Sector Surges Again in 2025: Outshining Technology Giants

The communications sector is making headlines in 2025 as it continues its remarkable performance. Year to date, it remains the top performer among the 11 stock market sectors.

This surge might seem unexpected, especially with technology giants like Nvidia, Broadcom, and Palantir Technologies dominating discussions. However, the communications sector possesses unique strengths that could enable it to persist outperforming major benchmarks like the S&P 500.

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The Vanguard Communication Services exchange-traded fund (ETF) (NYSEMKT: VOX) offers a straightforward and affordable way to invest in this sector. With a low expense ratio of just 0.09%, or 90 cents for every $1,000 invested, it provides a cost-effective way to track the communications sector’s performance.

Here are some key factors driving the sector’s growth, along with why the Vanguard Communication Services ETF might be a smart buy.

Image source: Getty Images.

Concentration Among Industry Leaders

Close to half of the communications sector’s value is concentrated in just two companies: Meta Platforms (NASDAQ: META) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Unlike other sectors, which tend to have a wider distribution of investments, communications is significantly weighted in these two players.

Data source: Vanguard Group.

Even though the Vanguard Communication Services ETF includes 117 holdings, it remains less diversified due to the heavy reliance on its major companies. About 11.8% of the fund is invested in media leaders like Netflix, Walt Disney, and Comcast, while telecom giants AT&T, Verizon Communications, and T-Mobile make up 10.4% of its assets.

Overall, this points to a substantial bet on a limited number of firms.

The Rise of Social Media

The dominance of Meta Platforms and Alphabet highlights the significant value of social media today, contrasting sharply with traditional communications companies. Their stock valuations tell a powerful story, as these two firms possess arguably the most successful business models globally.

In 2024, Google Services, which encompasses YouTube ads and Google Search, produced a revenue of $304.93 billion with an impressive operating income of $121.27 billion, resulting in an operating margin of 39.8%.

This figure does not include revenue generated by Google Cloud, which is currently Alphabet’s fastest-growing segment, though it operates at a lower margin due to ongoing investments aimed at enhancing capacity in competition with Amazon Web Services and Microsoft Azure.

Meanwhile, Meta Platforms generated $164.5 billion in revenue through its suite of apps, including Instagram and Facebook, yielding an operating income of $87.1 billion and a robust operating margin of 53%.

The reason behind the high margins for both companies lies in their capital-light advertising business models. Unlike companies like Netflix, Disney, and Comcast that heavily invest in content production, or telecom firms that must maintain physical networks and customer support, Meta and Alphabet have relatively low operational costs. This enables them to convert a greater portion of sales into profit. The majority of their expenses come from workforce and platform maintenance, as content creators on YouTube and Instagram largely handle content production.

These high margins facilitate extensive research and development efforts, stock buybacks, and, for some companies, dividend payments. In 2025, Meta plans to invest $65 billion in capital expenditures primarily aimed at enhancing its artificial intelligence (AI) initiatives to boost user engagement and refine advertisers’ campaigns. Its Reality Labs division, despite posting losses, focuses on developing virtual and augmented reality technologies—a venture made feasible by the strength of its advertising revenue.

On the other hand, Alphabet is integrating AI features into Google Search and expanding its cloud services. This year, it has forecasted a staggering $75 billion in capital expenditures. Despite these advantages, Alphabet is trading at a forward price-to-earnings (P/E) ratio of just 20.4, suggesting potential for growth ahead.