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The Edge

Hopes fade for a cell tower boom

For investors, the stars certainly seemed to be aligning for a massive boom in the cell tower industry.

Roughly a year ago, T-Mobile promised a major network overhaul if it successfully merged with Sprint. Dish Network was lined up to enter the US wireless industry as a new, nationwide 5G network operator. And the FCC was scheduled to auction off valuable C-band spectrum, potentially necessitating significant spending by winning bidders.

Each one of those events was expected to create major demand for cell towers, thus driving revenues to the big companies that own them: Crown Castle, American Tower and SBA Communications.

Investors rallied to the opportunity. After bottoming in 2016, cell tower stocks have been on a tear in recent years.

Now, however, reality appears to be settling in on the cell tower industry. What was once viewed as a once-in-a-decade confluence of catalysts is now looking more like a relatively modest opportunity for gradual growth.

"It would certainly be inappropriate to describe 2020 as a lost year for the towers, but it's been clear for some time that 2020 won't live up to the hopes that investors had developed in 2019," wrote the financial analysts at MoffettNathanson in their own recent report to investors.

Others agreed, and noted that forecast extends into next year.

"Earlier in 2020, the general investor perspective was that 2021 would be a year of accelerated leasing activity in the US tower space," wrote the financial investors at Wells Fargo in a recent note to investors. However, "it appears 2021 may not see quite as large a ramp as some investors had originally expected."

To be clear, there are plenty of details to sift through now that all the big, public US cell tower companies have reported their quarterly financials. And, as in any industry, some companies seem to be ahead, while others are behind. Moreover, the basic financial catalysts driving the companies' long-term prospects haven't changed. 5G is still a thing.

But it is becoming clear that 2020, and even potentially 2021, won't be the cash bonanza that many investors had hoped for.

Jostling for position

The narratives for each of the big cell tower companies are decidedly mixed. For example, Crown Castle's results came in below most analyst expectations, and perhaps more importantly the company offered 2021 guidance nowhere near investors' high hopes.

"Crown Castle's initial 2021 guidance, which comes a quarter earlier than that of its peers, gives us our first glimpse at what we should expect from an authoritative source," the MoffettNathanson analysts wrote. "Unfortunately, it's not that inspiring."

However, some analysts cheered the company's relatively dour outlook, hoping that it paves the way for Crown Castle to outperform those expectations. "We now see upside in Crown Castle," wrote the financial analysts at Raymond James.

More recently, both American Tower and SBA Communications offered somewhat more upbeat results and outlooks. For example, both companies raised their overall guidance for 2020. And American Tower specifically outlined its overall, long-term hopes for the edge computing space.

American Tower, for its part, also inked a massive 15-year, $17 billion agreement with T-Mobile during its most recent quarter. Analysts were somewhat mixed on the implications of the agreement, cheering the fact that T-Mobile is opening its purse strings but worrying that the details of the agreement – including somewhat slower-than-expected growth rates – could dampen its overall value.


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Shifting drivers

The catalysts hanging over the US cell tower industry haven't fundamentally changed. But the timing certainly has.

Specifically:

  • The closing of T-Mobile's merger with Sprint was delayed roughly a year. And since the close of the merger, the company has been slower to sign agreements with big tower companies than many had expected. Although T-Mobile's agreement with American Tower paves the way for similar deals with the likes of Crown Castle, SBA and others, the situation has certainly affected the timing of some analysts' expectations.
  • Dish Network is moving forward with its 5G buildout, but not as fast as some had hoped. The company has indicated it will begin physical work on its network sometime next year. But Dish scored a more relaxed buildout timeline from federal regulators. "Dish is in active discussions with all the tower companies, even if we likely won't see meaningful leasing activity next year (especially since Dish's 70% population coverage requirement for its 5G network was pushed out to June 2025 last month if it can achieve 50% coverage by June 2023)," explained the analysts with Wells Fargo.
  • The massive C-band spectrum auction, scheduled for later this year, ought to drive interest in cell towers, but it's hard to tell exactly how that might play out. "Verizon is expected to aggressively bid on and deploy C-band spectrum, but the degree to which that will help 2021 is unclear given the spectrum clearing timeframe," explained the MoffettNathanson analysts.

Thus, the overall takeaway, according to analysts, is that there are still several major growth opportunities in the US cell tower industry, but it's unclear exactly how that situation will play out over the next few years.

"We think the future remains quite bright for the US towers, but we're hopeful that expectations will be reset to more realistic levels, as 2021 may not quite be the 'boom' year some had predicted," wrote the Wells Fargo analysts.

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Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano

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