If any area has seen consistent growth over the past 20 years, it is the telecom infrastructure arena, and you don’t need to be a Wall Street analyst to see why. Just by looking around you see countless people either talking on their mobile phone via wireless from a nearby tower or looking up some piece of information that is stored on a server at a data center. The good news for investors is that the demand and growth should continue.
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A new Goldman Sachs research report focuses on the analysts’ two favored tower stocks and the top pick in the data center arena. Citing outperformance in the second quarter, the Goldman Sachs team had this to say about the sector prior to earnings releases:

Following recent outperformance in tower and data center stocks, we find that sentiment remains positive on the telecom infrastructure space (based on our conversations with investors), ahead of second-quarter 2021 results. For towers, we believe that investors will focus on tower operators’ opportunity to accelerate their gross domestic organic growth in the second half of 2021 and beyond. For data centers, we expect investors to focus on whether record hyperscale and retail colocation bookings will persist. In this note, we address key questions and debates related to these themes and highlight key investor areas of focus for the tower and data center operators in the second quarter.

The analysts have two top picks, and a third company rated Buy that looks attractive. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

American Tower

This wireless tower stock is a top pick on Wall Street and at Goldman Sachs, and it is acknowledged as an industry leader. American Tower Corp. (NYSE: AMT) is the largest global owner and operator of wireless and broadcast communications towers. Its portfolio includes approximately 170,000 sites in the United States, Latin America, India, Europe and Africa. The core business for the company is leasing space on its wireless towers, primarily to wireless carriers, government agencies and broadband data providers.

On a multiple basis, the stock trades cheaper than the competition, and many top analysts around Wall Street feel the growth potential for the company remains among the best in the industry. Goldman Sachs had this to say about its top tower pick:

We see limited downside risk to domestic leasing estimates for American Tower, as we believe that consensus (Visible Alpha) reflects the company’s multi-year outlook for organic growth. We believe that the recently completed Telxius deal could drive upside to 2022 consensus adjusted funds from operations/share estimates ($9.91 vs. $10.03 Goldman Sachs estimate.

American Tower stock investors receive a 1.74% distribution. The Goldman Sachs price target for the shares is $310, and the Wall Street consensus target is $283.76. The shares closed trading on Tuesday at $278.53.

The top data center pick at Goldman Sachs is one of the larger companies in the arena. Equinix Inc. (NASDAQ: EQIX) provides data center services to protect and connect the information assets for the enterprises, financial services companies and content and network providers, primarily in the Americas, Europe, the Middle East, Africa and the Asia-Pacific.
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The company provides colocation services and related offerings, including operations space, storage space, cabinets and power for customers colocation needs; interconnection services, comprising physical cross connect/direct interconnections, Equinix Internet Exchange, Equinix Cloud Exchange, Equinix Metro Connect and Internet connectivity services; and managed IT infrastructure services, including installation of customer equipment and cabling, as well as equipment rebooting and power cycling, card swapping and emergency equipment replacement services.

The analysts cited these four top reasons to own the shares of the industry powerhouse:

1) Enterprises’ acceleration of their digital transformation plans should provide a long-term revenue tailwind for the company.

2) We have high visibility into the company’s long-term revenue, EBITDA and AFFO/share growth following the company’s analyst day and believe that there is limited downside risk to consensus estimates.

3) We estimate that Equinix could generate >$10bn of excess liquidity that could fund M&A, strategic investments or capital returns over the next 6 years, which suggests upside potential to our AFFO/share estimates.

4) The company’s sector high AFFO/share growth (Goldman Sachs estimates 3-year compounded annual growth rate of 9% vs. 8% for the median data center peer) could drive further upside to EQIX’s premium valuation (28.9x Next 12 months/Adjusted funds from operations vs. 24.4x for the average data center).

Investors receive a 1.39% distribution. Goldman Sachs has a towering $910 target price, while the posted consensus target is $866.29. Equinix stock closed at $823.04 a share on Tuesday.

This is the other company with a Buy rating at Goldman Sachs, and it is another outstanding idea for long-term growth investors looking for dependable ideas. SBA Communications Corp. (NASDAQ: SBAC) is the third largest U.S. wireless tower company, with approximately 25,000 towers spread across the United States, Canada and Latin America.
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The core business for SBA is leasing antenna space on its towers to various wireless service providers on a long-term basis. The company also manages rooftop and tower sites for property owners under various contractual arrangements, and it has a large site development and construction division.

Goldman Sachs noted this:

We expect second quarter gross domestic same tower organic growth to be the low-water mark for the year (at 5.6%), consistent with management commentary (on its 1Q21 earnings call) that gross domestic same tower organic growth should be at or near a trough in the second quarter of 2021, followed by an improvement in the second half of this year, which should continue to increase into 2022. As such, we model gross domestic same tower organic growth increasing from 5.6% in the second quarter to 6.4% in the fourth quarter, with further acceleration to 7.2% in 2022. We also expect domestic same tower organic growth (on a net basis) to improve from 3.1% in the second quarter to 3.7% in the fourth quarter.

Investors receive just a 0.70% dividend. The $370 Goldman Sachs price target on SBA Communications stock compares with the lower $339.33 consensus target and Tuesday’s closing print of $329.15.

All the stocks in this group have had a powerful run over the past few years, so it makes sense to perhaps scale-buy positions now and look for a sell-off in the stock market to perhaps offer an attractive entry point to add more shares. Either way, the demand growth should remain sequential for years, and these top companies will continue to lead the way.

Note that all three companies are real estate investment trusts, so the distributions may contain return of principal.

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