Tower Stocks: Solid Long-Term Fundamentals Support a Buying Opportunity After Stock Selloff

After a long stretch of overvaluation, sentiment around the wireless tower industry has swung the other way. Each of the five independent tower firms we cover globally is now undervalued relative to our fair value estimates and trading in a 4- or 5-star range. Though the stocks have been volatile, especially around interest rate movements, we haven’t seen much change to the companies’ fundamentals. We believe tower firms have long-term secular tailwinds, great business models that include contractual recurring revenue with annual escalators, and narrow moats. In our view, the market has presented a compelling opportunity.

While we believe the interest-rate environment is a big factor in the change of the stocks’ fortunes, we also see less exuberance about future network investment, especially in the United States and Europe. Firms with U.S. exposure were previously most overvalued relative to our fair value estimate, following a series of spectrum auctions and excitement around 5G network rollouts. New carrier investment on towers will likely slow from the rates of the last couple of years in the U.S., but spectrum deployments and 5G network buildouts have not concluded. Even beyond those specific drivers, we expect annual incremental investment on towers to be perpetual as long as consumers and businesses continue to rely more and more on wireless networks.

We believe the tower firms are poised to grow in all geographic markets and that investors should consider geographic exposure when choosing tower stocks. American Tower has the broadest global exposure. Cellnex CLNX and Inwit are confined to various European countries, and Crown Castle and SBA Communications offer the purest U.S. tower exposure. Developed markets should require less capital investment and offer more margin expansion potential, but we expect lower growth prospects than in countries without such developed wireless networks.