Communication Services: Alphabet and Meta’s Moats Remain Despite Escalating AI Investments

We maintained our wide moat ratings on Alphabet GOOGL and Meta Platforms META after reevaluating the potential impact of artificial intelligence on each firm. Overinvestment is the biggest AI-related risk, in our view, with Alphabet budgeting $180 billion and Meta budgeting $125 billion for capital spending in 2026. These staggering sums will consume most of the cash flow each firm generates; Google produced $165 billion of operating cash flow last year, while Meta generated more than $115 billion. The red-hot digital ad market should enable the companies to meet their spending plans without taxing their balance sheets, but both have placed massive bond deals in recent months to pad their war chests.

If AI fails to deliver acceptable returns on these investments, we expect Alphabet and Meta’s core ad businesses to remain dominant. Ad revenue growth has reaccelerated at both firms recently, as AI investments have increased user interactions (engagement and search queries) and improved ad targeting, lifting ad prices. We expect these trends to continue well into the future as AI tools gain adoption.

Amazon AMZN is the only firm with the scale to rival Alphabet and Meta, and its ad business is also growing nicely, with sales expanding 22% to $67 billion in 2025. While still less than a quarter the size of Alphabet’s ad business, Amazon is investing aggressively in ad technology. Amazon’s demand-side platform offers a rich opportunity for advertisers to reach narrowly targeted audiences, based on the company’s proprietary first-party data and its roster of compelling streaming content. This position has weighed heavily on Trade Desk TTD, and we downgraded our moat rating on the firm to none. We expect Amazon to pressure pricing and steadily poach Trade Desk clients.

Netflix NFLX wisely walked away from Warner Bros. Discovery WBD after Paramount Skydance PSKY raised its offer for the firm. Netflix would have overpaid for a streaming and studio business that it doesn’t need, in our view, given the strength of its existing business. We expect Netflix’s growing customer base to enable it to invest more than any other firm in new entertainment content, while dabbling in sports rights only when it makes financial sense, rather than out of desperation to hold onto viewers.

Top Communication Services Sector Picks

Comcast

• Fair Value Estimate: $41.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

Comcast CMCSA continues to shed broadband customers, pushing its share lower, as investors fear this business is entering perpetual decline. We believe those fears are unwarranted. Unlike fixed-line phone service or traditional television offerings, demand for basic internet connectivity isn’t going anywhere. The market is undergoing a shift in competitive balance, but we expect this shift to run its course as fiber network expansion matures and wireless network capacity is absorbed. Comcast’s shares yield more than 4%, and the firm has been using excess cash flow to repurchase shares. A shift in media strategy around NBC Universal could also push the stock higher.

Walt Disney

• Fair Value Estimate: $120.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

We see Disney DIS as modestly undervalued, but it remains easily the most attractive among its video media peers, given quality, risk, and valuation. We see a runway for accelerating top- and bottom-line growth over the next several years and a likelihood that the firm exceeds our near-term projections, which build in macroeconomic risk. With linear TV revenue becoming much less material to overall results and added experiences capacity coming online, sales growth should accelerate. Ongoing profit improvements in the maturing streaming business and the commencement of new experiences revenue to catch up with the investments of the past few years should bring margin expansion.

Omnicom

• Fair Value Estimate: $115.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Traditional ad agencies like Omnicom OMCL have been sapped by AI fears. AI-powered tools may erode pricing power for creative and production services, but the core of the agency’s business now centers on omnichannel marketing planning and data asset management, which we believe will play an increasingly important role in a complex and fragmented ad ecosystem. With the IPG merger closed, we expect Omnicom to join Publicis in outperforming other agencies, thanks to its trainable data assets that can improve targeting and conversion efficiency.