The headline of the latest ad for Bull and Bust Report was pretty much all we needed to predict that a bunch of readers would ask about this ad:
“How America’s 5G Revolution Just Opened a $12 Trillion Reservoir of Cash For Investors Everywhere
“Right now, THREE unknown companies have a stranglehold on the entire 5G market…
“And investors are licking their chops over the chance at gains of 1,000%… 2,000%… even 5,000%”
[This article was originally published on June 19. It has not been updated or revised, just re-posted here to help answer reader questions.]
We’ve seen plenty of 5G teasers over the past year or so, of course — that’s perhaps the most obvious and well-telegraphed technology transition in history, mostly because investors now have the past examples of the 3G and 4G/LTE transitions in mobile technology to look at for guidance… and have had the experience of seeing what a huge difference the mobile internet has made in the world in just 5-10 years, which makes the hype about “100X faster” connections from 5G all the more compelling and relatable.
And the hype in this ad is similar to that used in dozens of other ads… but here’s just a taste:
“It’s the greatest groundswell of technology the world has ever seen.
“As Qualcomm CEO Steve Mollenkompf says, ‘5G will have an impact similar to the introduction of electricity or the car, affecting entire economies and benefitting entire societies.’
“This is bigger than the dot-com era, the oil boom, and even the Industrial Revolution.
“So what does this mean for you?
“It means you have the unique opportunity to get in on the 5G revolution before it becomes a $12 trillion industry in the coming years.”
5G has the potential, as the infrastructure is built out and the devices created and sold, to make possible huge changes and advances in health care, transportation, entertainment, manufacturing… you name it, there’s some hope and some hype for that sector.
I don’t argue with any of that, though I will just cautiously remind you that the 5G infrastructure buildout and the adoption of this technology is not going to be a one or two year story, most people won’t be using 5G in 2020 or 2021… we’re really still just getting started, and this is more likely to be a 15-20 year story.
Which is not a bad thing for those investing in the future of telecommunications and mobile networks, it just means you should go in with some patience and get those daydreams of 1,000% gains out of your head first. 1,000% gains come from either surprise changes or a combination of luck and patience — big changes are probably coming, but everyone in the industry sees them coming, so it’s not going to be a surprise. Which means it will take time and investment to get to those big changes, and some luck and patience to pick the right investments and stick with them to hope for those big long-term gains.
So what are those three companies? We get into the the specific hints now…
“Even though 5G devices are ready for shelves the minute the networks are rolled out…
“And even though we’ve seen test networks pop up in various cities all over the globe…
“And despite major media outlets teasing how close 5G is…
“None of this will come true if not for THREE companies I’ve found that are secretly in absolute control of the entire 5G race.”
Ooooh, absolute control! That sounds delicious!
What’s he talking about? More from the ad:
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“… for 5G to be a success, there is one important component that 5G absolutely cannot become a reality without.
“And I’m not talking about computer chips, modems, or anything like that.
“I’m talking about cell towers.”
Ah, so now we’re probably in the territory where we don’t even have to pull out the Thinkolator to know where DeHaemer’s headed… there are, after all, only three cell tower companies of meaningful size. Is he just teasing those?
Let’s get a few more tidbits:
“Verizon, Sprint, T-Mobile, and every other carrier are all reliant on these three companies.
“If these companies went under, there wouldn’t be any cell networks.
“This is why cell carriers continually spend 20%–30% of their revenue on cell tower leases.
“It’s, by far, their most significant operating expense.”
Well that’s silly… yes, these companies have difficult-to-replace assets, but the assets exist as distinct from the companies — much like a shopping mall continues to exist if its owner “goes under.” And the big tower companies are essentially financial firms — they were created when AT&T and Verizon decided they could use “financial engineering” to get those expensive assets off their balance sheets and pay rent on them instead of paying for building, maintenance and depreciation. If these firms fail, someone else will step in and operate the towers and other cell sites they currently own.
And, of course, there are a lot of tower owners in the US. The big wireless telecom companies still own a lot of them, like Verizon and AT&T, and many are privately held or owned by companies that would seem a little surprising (there are quite a few cell towers on railroad right-of-ways, for example, that seem to be owned by the railroads). But there are really just three companies that come to mind when it comes to “cell tower companies” — let’s see if those three are the companies DeHaemer is touting, or if there’s a surprise somewhere. On to the clues!
“… the upgrade to 5G is going to cost the major carriers $125 billion over the next two years.
“And by 2025, that spending will hit an astronomical $326 billion.
“It’s a TON of money, but any telecom that wants to stay relevant will certainly shell out the money.
“That means the three companies I’m sharing with you are about to receive a massive tidal wave of cash….
“Three Stocks to Play for 1,000%+ Gains”
And the specifics…
“… the three companies I’ve been pounding the table about own an astonishing 80% of the cell towers in the United States.
“They’ve become what amounts to the ‘landlords of 5G.'”
And then we go company by company…
“5G Profit King #1: The Fastest Growing Player in 5G
“The first company has been around since the mid-90s….
“They have more than 170,000 cell towers already in place across the globe, with an astounding 40,000 of them in the U.S. alone….
“They have clients all over the globe, including:
* Telefónica in Brazil, Chile, and Peru
* MTN Group in Ghana, South Africa, and Uganda
* Grupo Iusacell in Mexico
* Nextel International in Chile and Mexico
* Vodafone in India, Germany, and South Africa”
And this is a cash-to-you company as well…
“Since 2007, their revenue has grown at a 16% compounded annual rate, reaching $6.5 billion.
“Even better, these guys pay a hefty dividend.
“They’ve been doing so since 2011 and have boosted the payout by 182% in the past five years.”
So who is that? Well, $6.5 billion was roughly the 2017 revenue number… they’re now over $7.5 billion for the past year, but this is American Tower (AMT), the leader of the cell tower REITs (and usually, as now, the most richly valued). AMT has a market cap of almost $95 billion, has a large international presence, and trades at about 30X 2019’s adjusted FFO forecasts, with a dividend yield of about 1.6%.
I’ll talk a little bit more about the three of these stocks together at the end, but let’s make sure we get them all named first…
“5G Profit King #2: About to Witness Huge Growth
“The next 5G company you need to pay attention to has also been around for more than two decades.
“And they have almost 30,000 towers all over the world, 16,000 of which are in the United States.
“Already this year, they’ve built 72 new towers and invested in more new tower builds, tower improvements, and purchase of new land.”
“Right now, they’re the third largest cell tower operator and have clients in Canada, Costa Rica, El Salvador, Nicaragua, Panama, and of course the U.S….
“And as 5G approaches, Marketwatch says this company is about ‘to witness huge growth.'”
OK, so no surprise, this one is SBA Communications (SBAC), which is arguably the fastest-growing but also most historically worrisome cell tower REIT. They’ve been restructuring and delevering over the past few years, and have also bought back some shares, but despite converting to REIT status they have not yet begun to pay a dividend (and likely won’t have to for another year or two, at least, since their historical losses are so substantial).
But yes, they have been growing their revenue and expect to keep growing in the low single digits this year, and they expect to have AFFO per share of somewhere between $8.02 and $8.47 in 2019 (they were right around $2 in the first quarter, so… so far so good, I guess). At $229, that means you’re paying about 27X current year AFFO for the shares.
And the last one? I bet you can guess what it is, but let’s check in to be sure…
“5G Profit King #3: Decades of Opportunity
“The final 5G kingpin owns, operates, and leases more than 40,000 cell towers across every major U.S. market….
“They just completed a massive $4.85 billion deal with AT&T…
“Inked a $2.4 billion deal with T-Mobile….
“On top of that, the company is on the verge of building a brand new 420,000-square-foot facility in Houston, Texas….
“Perhaps this is why a top insider recently made the largest stock purchase of this company in nearly two years.”
This is the only huge tower REIT that is focused overwhelmingly on the domestic US market, with no meaningful investment overseas… and that has made things a little smoother for them, particularly with the strong dollar, but it’s also the only one that I own and the one that pays a meaningful dividend… this is Crown Castle (CCI), which I wrote about just a week or so ago when it was being teased by the Motley Fool.
5G will bring substantial revenue boosts to the tower and cell-site companies who have invested in building their infrastructure — partly because 4G isn’t going anywhere, so telecoms can’t just swap out their 4G equipment for 5G, this is an additive process, and partly because 5G requires a lot more locations because the frequencies used can’t travel as far and can’t get through walls as easily as 4G signals.
That also opens it up for other property owners and for folks like municipalities to lease out space (like on traffic signals or streetlights, for example), so there will be some more competition, but I imagine that the big players will remain big and continue to get a lot of the business — they are established, they are well-funded, and they have relationships with all the players involved and expertise at the thorny stuff like zoning rules, FCC standards, power and backhaul connections, etc.
I won’t re-invent the wheel here to summarize my thinking about these three major players, but the simple fact is that they mostly trade together on sentiment about 5G these days, so an investment in any of them is pretty likely to be within shouting distance of the other two over the next couple years… and if you want to find a profitable “edge” investing in this space you’d probably want to know more than the basic shorthand that most tower REIT investors can recite: AMT is the big blue chip, SBAC is the challenged one that doesn’t pay a dividend yet, CCI is the US-only one and the only one with an above-average dividend.
They’re all expensive, and they all will be competing for contracts to some degree… and probably also competing with the telecom companies themselves, some of whom are no doubt regretting that they prioritized short-term gains and took that little fixed cost piece of their business, tower ownership, and turned it into a leasing expense over which they have little control.
Here’s what I wrote last week when I was covering CCI, in case you missed it:
There are a few tower operators of meaningful size, and they’re all pretty expensive and have all converted to become Real Estate Investment Trusts for the tax benefits — American Tower (AMT) is the leader both in size and international scope but pays a paltry dividend, SBA Communications (SBAC) also has substantial international holdings but was a turnaround until recently and, though it has converted to REIT status, had such large carryover losses that they won’t have to pay a dividend for years. That, in large part, was why I settled on CCI as my favorite in the bunch — a decent-size dividend, meaningful dividend growth (should grow at 7-8% a year, current yield is about 3.3%), and good small cell exposure in the US without the currency fluctuations (or growth potential) that SBAC and AMT bring from their foreign operations.
To be fair, though, none of the tower REITs have really been what you’d call “cheap” for years. In CCI’s case, their guidance for funds from operations (FFO, a cash flow measure used by REITs that investors usually see as more useful than earnings, which are far lower because of depreciation) provides for about $2.3 billion in 2019, or $2.4-2.45 billion in adjusted FFO (AFFO). They prefer AFFO, and that’s what analysts generally seem to use, so that means the stock, with a $55 billion market cap, is now trading at something like 22X AFFO.
Still, that’s cheaper than American Tower, which trades at 30X their expected 2019 AFFO (AMT is, to be fair, growing faster — their revenue growth advantage has shrunk over the past year or so thanks in part to the strong dollar, but their dividend growth is much better — 20% dividend growth over the past year, and they tend to increase it a bit each quarter, though the current yield is only 1.6%). I think of CCI as more of a “steady eddie” than AMT and SBAC, but over the past five years it has also trailed the other two much of the time… here’s the five-year total return chart:
And the one-year:
My hope had been that CCI (and the others) would see a meaningful dip this year as fear about the potential Sprint/T-Mobile merger puts a dent in their revenue expectations… but that no longer seems terribly likely. The merger might or might not go through, but it looks like government approval will hinge somewhat on the companies spawning off enough of their assets to make room for a fourth player to come in… and it’s pretty clear that even with a merger they’ll have to operate two overlapping networks for a long time, and that investment in 5G could easily be enough to ameliorate the impact of losing one of their major customers.
I continue to like CCI, mostly because of the US focus and the steady growth in the dividend and the decent-size payout, and the likelihood that demand for small cell and tower locations should keep growing over the next 5-10 years… though I also continue to think it’s pretty expensive. And though it has been a successful investment for years, it has clearly, in retrospect, been a poor choice relative to AMT (which was also more expensive, and with a smaller yield, five years ago).
All the tower stocks have been hot of late… they even got the “Jim Cramer” treatment a couple weeks ago, so I’ll share that video clip with you in case you want a pitch about the cell tower business with a few of his bells and whistles (at the time, CCI was Cramer’s favorite as well — though take that with a grain of salt)…
These are companies that build and own real stuff, so they can’t magically grow at nosebleed rates… but they are in a sector where supply is hard to add, and where we should see substantial growth in demand over the next 5-10 years, and the recent trend toward falling (again!) interest rates helps to make the relatively small yield look more appealing and makes REITs of all kinds seem sexier (and, probably, helps them to reduce their borrowing costs… all of the tower REITs carry a fair amount of debt). I’m happy with my small CCI position, and wouldn’t try to talk you out of any of them… but these are big and richly valued names, they’re all at all-time highs, and they’re not going to make you rich overnight.
And with that, I’ll leave it with you — no surprises here, the big three have been the big three for many years, and they have their distinctions (largely internationally) but are clearly driven by the same trends of increased data use, eventual 5G migration, and increased demand for seamless global mobile coverage. They’re important parts of the infrastructure, and they aren’t going anywhere, but if you want the chance to bank 1,000% returns on any of these ideas I’d be prepared to wait at least 10-15 years — and probably still temper those expectations. All three have generated returns in the 1,000% neighborhood over a 10-15 year period now, but it becomes much harder to grow that fast once you’re already a $30-90 billion company, or if you start at a lofty valuation like they all trade at today.
But that’s just my thinking — and, of course, when it comes to your money you have to make the call… do you like any of the big three tower companies for their 5G-related potential? Betting big on one over the others? Think they’re all crazy, or have better 5G infrastructure investments we should consider? Let us know with a comment below. Thanks for reading!
Disclosure: Among the companies mentioned above, I own shares of Crown Castle. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.