The nation's three large cell tower owners -- SBA Communications, American Tower and Crown Castle -- have been enjoying a pretty incredible run in the stock market in recent years.
Their collective shares are up 93% over the past three years, and have outperformed the S&P by 46%, as the analysts at Wall Street firm New Street Research point out.
"We never would have anticipated the stock action we've witnessed over the past year, at least with this speed and intensity," agreed the analysts at Wall Street research firm MoffettNathanson in a recent report. "American Tower at $209! Crown Castle at $134! SBA at $233! Wow. Since bottoming in the wake of the 2016 presidential election, the Towers (with the notable exception of Crown Castle) have meaningfully outperformed the S&P 500."
Figure 1: 
Source: MoffettNathanson
Companies including SBA and Crown Castle are the ones that own many of the cell towers that AT&T and Verizon are hanging their 5G antennas from. As a result, tower companies can charge rental fees for their "vertical real estate" at rates that would make landlords in other industries blush.
But the Wall Street analysts at MoffettNathanson, New Street Research and elsewhere are warning that the good times in the tower sector are coming to a close, and that the realities of 5G -- as well as shifts in the tax code, Wall Street investment funds and other financial realities -- likely will drag on the sector for the foreseeable future.
"2019 may be the peak year of activity," wrote the New Street analysts in a recent report on the tower sector. "The deployments of several spectrum bands drove a sharp increase in amendments for tower companies in 2018, and we expect them to be even higher in 2019. AT&T is driving most of the activity as they deploy AWS-3, WCS, and FirstNet spectrum, while T-Mobile's 600MHz and, to a lesser extent, Sprint's 2.5GHz deployments have also helped. We expect amendments to peak in 2019 and to decline sharply in 2020. Thereafter, we don't foresee a major amendment cycle until spectrum is deployed for 5G. We expect macro site colocations to remain relatively stable over the forecast period, as carriers shift densification efforts to small cells."
The analysts at MoffettNathanson largely agreed, writing that tower stocks today "do not offer much upside."
In a lengthy and detailed report on the financials of the tower companies, the analysts at MoffettNathanson argued that SBA, American Tower and Crown Castle have benefited from financial trends including real estate-oriented funds recently increasing ownership in tower stocks. The firm said the recent decrease in corporate tax rates also likely raised interest in tower stocks. Other issues affecting tower stocks include changes in interest rates and the cost of capital.
However, uncertainties could affect tower companies in the days, months and years to come -- and that ambiguity could drive investor activity. Specifically:
The proposed merger between Sprint and T-Mobile remains in limbo. If the companies are allowed to merge, the number of big wireless network operators looking for cell tower space would be reduced from four to three. On the other hand, the merged Sprint and T-Mobile has promised to dramatically raise its spending on its network in the years following the merger.
The proposed merger of Sprint and T-Mobile could, potentially, create a fourth nationwide wireless network player, possibly Dish Network. In that case, Dish could potentially grow into a new tower customer, thus generating new revenues for tower companies.
Wireless operator interest in deploying small cells continues to grow. Such gadgets are different than standard macro cell towers because they are small enough to sit atop light poles and other so-called "street furniture." However, it's unclear whether the small cell trend will have a major impact on SBA and American Tower (which are not investing in small cells) and Crown Castle (which has made a major investment in small cells). "We remain skeptical that the US small cell market will grow fast enough for Crown Castle to generate towerlike returns," wrote the analysts at New Street.
Finally, the FCC is doggedly working to release more spectrum for commercial services, including 5G. Indeed, the agency just this week said it will auction 2.5GHz spectrum at some point in the future, and has scheduled an auction of 37GHz, 39GHz and 47GHz spectrum licenses in December. C-Band and 3.5GHz CBRS spectrum likely also will soon be available. In order to put that spectrum to use, operators will likely need to deploy equipment on towers.
— Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano
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