When the latest bull market began cooling off amid a declining economy, soaring inflation and rising interest rates, many value investors started looking for bargains. However, those hoping for cell tower real estate investment trusts to go on sale had their hopes dashed once again, as these stocks never leave the overpriced list… or at least, that was the case until early August, when American Tower Corp. (AMT, Financial), Crown Castle Inc. (CCI, Financial) and SBA Communications Corp. (SBAC, Financial) all began to crash.
The sudden decline begs the question: Is there some legitimate danger to these businesses that would merit a lower valuation for the first time in many years, or do they represent attractive value opportunities?
The satellite disruption threat
Right now, it is an undeniable fact that we need cell towers in order to get cell phone service, and cell phone operators have no choice but to pay the owners of cell towers in order to use their infrastructure. This has put cell tower REITs in an incredibly lucrative position since their establishment in the 1990s, resulting in consistent capital gains and dividends for investors.
There is one thing that could potentially disrupt this effective oligopoly, though: low earth orbit satellites. SpaceX’s Starlink now provides internet from LEO satellites, and while it is expensive, less reliable and less powerful compared to fiber-based internet, it represents a step in a new direction for an industry that has remained reliant on the same basic infrastructure framework for decades.
Will we someday get our cell phone service from LEO satellites as well? If so, maybe cell tower REITs really are worth a much lower valuation. However, while it may seem like an easy solution at first glance, closer inspection reveals this option currently is not even remotely feasible.
For starters, it is prohibitively expensive. It costs tens of millions of dollars just to launch a single satellite into orbit, much less an entire network. That’s all well and good for Starlink internet, which has a basic plan that is “only” about twice the price of a fiber internet plan at $110 per month (plus a hefty $599 equipment fee) for up to 250 megabytes per month. However, mobile data is a different animal entirely. According to Ericsson’s Mobility Report, in 2021, smartphone users consumed an average of 12 gigabytes per month, which was higher than the 8.9 gigabytes average Ericsson originally projected.
Even if the technology can improve to the point where it might become cost-effective to adopt LEO satellite cell service at scale, there is also the problem of increased likelihood of lagging.
Say everything goes well with research and development, and the lagging problem is completely solved alongside the cost problem. That would be great, but problems would still remain; low earth orbit can only accommodate so many satellites, and said satellites would be easy to shoot down if, say, there was a war between countries with sufficiently advanced aerospace capabilities.
I feel like both of these issues are often overlooked when assessing the potential of technologies that rely on low earth orbit. We already have a problem with too many satellites and too much debris in orbit. If multiple telecommunications companies around the world began vying for massive amounts of orbit space, the results could be disastrous.
With the limits on classical computing, the bottom line is that LEO cell service just does not seem feasible. The only potential disruptor on the radar is quantum computing. China launched the first quantum satellite into orbit in 2016, and the European Union plans to launch a quantum encryption satellite in 2024. However, it is still much too early on in the development of quantum computing to see a feasible way in which it could be deployed at scale for mass communications.
Growth and outlooks remain strong
With a major industry disruptor unlikely to appear any time soon, let’s look to the recent growth and outlooks for the three main cell tower REITs.
American Tower Corp. (AMT, Financial) is the largest of the trio with a market cap of $102.64 billion. Its three-year revenue per share growth rate is in the middle at 7.1%, and its three-year Ebitda per share growth rate is the best of the pack at 13%. Morningstar (MORN, Financial) analysts are estimating revenue to grow at a rate of around 4.95% for the next three to five years.
Next is Crown Castle Inc. (CCI, Financial) with a market cap of $61.09 billion. Its revenue per share has grown about 4.1% per year over the past three years, while its Ebitda per share has grown around 5.8%; both of these numbers are lower than its peers. Analysts are estimating three-to-five-year revenue growth at a rate of around 2.92%, which is also lower than peers.
Lastly, we have SBA Communications Corp. (SBAC, Financial) with a $32.29 billion market cap. It has grown its revenue per share at an average clip of 9.1% per year for the past three years, which is higher than American Tower and Crown Castle. Its Ebitda per share growth rate over the same period is in the middle at 8.7%. Analysts are calling for a 5.68% revenue growth rate over the next three to five years.
These companies are well past their rapid growth stages, as the U.S. cell tower market is already saturated for the most part. Any future growth will need to be due to the urbanization of rural areas and international expansion, though growth rates will likely remain on the lower side as these are already multibillion-dollar enterprises. However, their appeal as investments comes from their reliability; investors can be sure that cell towers will be in use for decades to come, and mobile data usage will almost certainly continue increasing as well.
Valuation analysis
Due to recent share price declines in the midst of continued earnings growth, all three of these cell tower REITs are trading at lower valuations than usual. Crown Castle has a low price-to-adjusted funds from operation ratio of 18.32, and while investors might expect it to be the cheapest of the three based on growth alone, it is actually more expensive than American Tower’s price-to-adjusted funds from operation ratio of 17.66. This is likely because REIT investors are often looking to dividend yields, and Crown Castle has a solid dividend yield of 4.16% versus American Tower’s 2.59%. SBA Communications has the highest valuation with a price-to-adjusted funds from operation ratio of 28.85 and a low dividend yield of 0.94%.
Several studies, such as the one conducted by John Bogle in “The Little Book of Common Sense Investing,” have found that in the long term, shareholders receive gains equivalent to the stock’s earnings per share plus dividends per share (minus any fees incurred when buying and selling stocks). Speculation may affect stocks one way or another, but making money from speculation is a different game from long-term investing.
By this logic, all three stocks appear to offer roughly equivalent value propositions, though a bigger portion of Crown Castle’s future value comes from its dividend, while SBA Communications is almost entirely reliant on growth. In the current risk-off environment, this gives Crown Castle an advantage.
