In 5G, US Carriers Aren't Putting Their Money Where Their Mouth Is, but They Will
Despite all the recent noise on the 5G front, a number of Wall Street analysts are essentially cautioning that all this 5G sound and fury has so far mostly signified mostly nothing. Meaning, wireless network operators in the US haven't really embarked on the kind of expensive network buildouts that many investors -- particularly those in the tower industry -- had expected.
"Based on recent checks, we believe this '5G hype' may be a bit premature, and near-term fundamentals have been somewhat ‘so so’ at best in given some key (and somewhat unique) initiatives in our view going on at each of the respective US wireless carriers," wrote the analysts at Wall Street research firm Wells Fargo Securities in a recent note to investors about the cell tower industry. "As a result, we believe the risk / reward for the sector at the present time is not an overly attractive one."
The firm said that, following its recent checks in the tower and wireless services space, it is downgrading its stock ratings on the tower sector. That's noteworthy considering the nation's three publicly traded tower companies -- American Tower, SBA Communications and Crown Castle -- have enjoyed major gains on Wall Street. Collectively, these three tower companies are seeing record-high share prices thanks to gains in the past six months of an an average of 31%. American Tower, SBA Communications and Crown Castle collectively own most of the nation's cell towers; they rent space on those towers to the likes of AT&T and Verizon.
But the analysts at Wells Fargo argued that Wall Street's newfound interest in tower companies may be misplaced -- or at least premature -- given the relatively sluggish spending among US wireless network operators like AT&T and Verizon.
AT&T and Verizon going slow
"While [AT&T's] FirstNet activity is still happening, our contacts were clear it is not playing out as aggressively as some of the tower companies hoped in terms of AT&T’s 'One Touch' plans," the Wells Fargo analysts wrote of AT&T's overall spending on its US wireless network, including its work to add FirstNet's 700MHz spectrum to its offerings. "Despite an improvement in spending in  Q1 vs. Q4, our contacts believe decisions at AT&T are being made by 'treasury' and more focused on improving the balance sheet."
AT&T, of course, has been focusing much of its overall corporate spending on reducing the record amount of debt it incurred through its $85 billion purchase of Time Warner.
Verizon, meanwhile, has been “taking a breath” on its network spending, according to the Wells Fargo analysts, who attributed the situation in part to the operator's recent cost-cutting initiatives. Verizon at the end of last year announced roughly 10,400 employees had accepted a buyout offer geared at reducing expenses.
"When a customer goes through much internal change we believe it is not overly surprising that it could enter somewhat of stagnant network spend as it aligns its decisions to its new internal practices," the Wells Fargo analysts wrote.
Verizon's cost-cutting effort, coupled with the slowdown in its network spending, may even have played a role in the operator's decidedly underwhelming 5G launch in Chicago. Although a variety of speed tests from the likes of PCMag and Cnet indicate Verizon's 5G network in Chicago supports impressively fast speeds, it's the network's footprint that's raising questions. Verizon's 5G wireless network in Chicago just doesn't cover a lot of real estate.
"We tested Verizon’s newly launched 5G network in Chicago. If performance does not improve, investors will once again question whether Verizon will have to materially increase its capital investment in order to enable millimeter wave spectrum in more than just limited hotspot locations," wrote Walter Piecyk, an analyst with Wall Street firm BTIG, in a recent blog post.
Warned BTIG's Piecyk: "Verizon has insisted that it can use their existing cell site footprint to roll out 5G technology on millimeter-wave spectrum. That seems very hard to believe. In our limited testing, the 5G small cells provided coverage of just ~350 feet. In fact, 5G performance suffered from reduced reliability beyond 200 feet when faced with street obstructions. That’s not even close to the 800-2,000 feet radius that Verizon and their vendors have promised. Meanwhile, Verizon’s LTE network, using mid-band spectrum, was clocking speeds north of 250 Mbps, which is more than adequate for nearly all applications."
Those findings gain even more significance in light of Verizon's mostly mild capital expense guidance for 2019. The company said it will spend between $17 and $18 billion on capex in 2019, up slightly from the $16.7 billion Verizon spent on its network in 2018, but roughly even with the $17.2 billion Verizon spent in 2017.
Similarly, AT&T said its 2019 capex will clock in at around $23 billion, excluding $1 billion in FirstNet reimbursements. Last year AT&T spent $21.3 billion on capex and in 2017 it spent $21.6 billion.
Those capex figures from AT&T and Verizon certainly don't reflect a major effort to increase the number of tower sites transmitting 5G signals in millimeter-wave spectrum.
More warnings on towers
Sluggish 5G spending by US operators will almost certainly will affect the financial results of their respective suppliers. Although 5G equipment vendors like Nokia and Ericsson have been offering mostly positive 5G outlooks, the companies that physically host operators' 5G equipment -- tower companies like SBA and Crown Castle -- may not see any 5G spending bumps, at least in the near term.
"Many investors expect the 5G deployment cycle to mimic the 4G deployment cycle," wrote the Wall Street analysts at New Street Research in a recent note to investors about the tower sector. "That is, they expect 5G to drive a discrete amendment event for tower companies that will boost organic growth materially. We disagree with this notion: the key difference is that carriers deployed 4G in conjunction with new spectrum (700MHz or AWS-1), while 5G equipment will be deployed alongside spectrum that is already apportioned for 4G. Carriers will therefore be able to operate the 5G network via a software upgrade, which won’t trigger tower amendments. We believe that Dish's spectrum and the C-Band will be the only bands deployed specifically for 5G. This promises to yield a similar revenue event for tower companies as 4G; however, the deployment is likely multiple years away."
Release of additional, unused spectrum -- like Dish Network's spectrum holdings or spectrum in the C Band -- could trigger additional spending by wireless network operators for 5G deployments, the analysts said. However, the analysts don't expect Dish Network's spectrum or C Band spectrum to be released for 5G anytime soon.
The New Street analysts predict that organic growth in the US tower industry could begin to fall in 2020 following the completion of projects including AT&T's FirstNet efforts, T-Mobile's 600MHz buildout and Sprint's 2.5GHz expansion.
The analysts at Wall Street research firm Cowen made similar warnings in a recent note to investors, mainly focused on whether the stocks for US tower companies are currently overvalued. The analysts noted that increasing investor interest in US tower companies including American Tower, SBA Communications and Crown Castle seems surprising given that both Crown Castle and SBA offered relatively modest growth expectations for 2019 and a merger between Sprint and T-Mobile could remove one of the tower companies' customers.
Interestingly, the Cowen analysts also wrote that much of the current interest in US tower companies among Wall Street investors may be due to the broader machinations of massive investment funds like Vanguard. The analysts noted that tower companies are increasingly being included in investment funds focused on real estate holdings.
Long-term outlook remains positive
All that said, a wide range of analysts continue to argue that 5G spending will pick up in the long term as the business case becomes clearer.
For example, a recent report from market research firm Dell'Oro Group found that global operator capex showed stabilization after three years of declines. Further, the firm predicted that capex growth will outpace operator revenue growth over the next three years due to 5G.
“While the relationship between capex/revenue will likely remain strong over time and constrained operator revenue growth will be one of the primary inhibitors of further telecom capex acceleration, we remain optimistic that there will be some deviation in the short-term to accommodate the rollout of 5G,” Dell’Oro analyst Stefan Pongratz said in a recent release. “And with the preliminary 5G capex guidance coming in stronger than expected, there is a lot of excitement right now about the potential 5G capex ramp."
Similarly, analyst firm Mobile Experts reported that the global 5G equipment market is poised for "sky-scraping growth."
"We've been tracking the macro base station market for 12 years, with 10-15 million transceivers shipping each year," Mobile Experts analyst Joe Madden said in a release. "Upcoming changes in the 5G and massive MIMO market will rocket the run rate to over 100 million within the next year. The field deployment will begin within a few months, but we're already seeing its impact in the component world."
Finally, the analysts at Wall Street firm Deutsche Bank Research offered a similarly positive outlook on the long-term aspects of 5G, including the revenue potential for operators. "5G represents a meaningful opportunity for incremental growth at the US wireless carriers, something which the industry has lacked," the analysts wrote in a recent note to investors. The firm argued that the market for fixed wireless access could reach a total addressable market (TAM) of around $80 billion by 2025, while the market for "enhanced mobile broadband" could grow to a $30 billion total addressable market over the next five to seven years.
"To help frame some perspective, we note Ericsson estimates a $582bn 'global' TAM (by 2026), for Telcos using 5G to address solutions ('industry digitalization') across eight different industries (Energy/Utilities, Manufacturing and Public Safety, to name a few)," the Deutsche Bank analysts wrote. "Over the last decade, the US has averaged ~20-25% of global GDP; using 20% implies a potential revenue opportunity of $115bn for the US Telcos."