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 demand and growth should continue.
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A new Goldman Sachs research report focuses on the analysts’ three favored tower stocks. Citing underperformance in the third quarter, the Goldman Sachs team had this to say about the segment prior to earnings releases:

Following recent underperformance, we believe the set-up for tower stocks appears attractive going into third-quarter results, where one top company will provide its initial outlook for leasing activity in 2022. We continue to expect acceleration in gross domestic organic growth in 2022. Since the third quarter began, two out of the three US tower operators have underperformed the S&P 500. We attribute this underperformance primarily to a rising 10-year Treasury yield (+14bps to 1.58%), which typically has an inverse correlation with tower stock performance. Indeed, this underperformance comes at a time when carriers have generally provided positive commentary around their pace of network investment, which should drive an acceleration in domestic leasing for tower operators.

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 one of its top tower picks:

While we don’t expect AMT to provide an update to its 2021 domestic organic tenant billings growth outlook (~3%), or provide its 2022 outlook, we do expect management to comment on the strength of the domestic leasing environment and the extent to which record second quarter applications levels persisted into the third quarter.

American Tower stock investors receive a 1.98% distribution. The Goldman Sachs price target is $310, and the Wall Street consensus target is $308.50. Shares closed on Wednesday at $264.18.

Equinix

This is one of the larger cap companies in the data center arena and another top pick at Goldman Sachs. Equinix Inc. (NASDAQ: EQIX) provides data center services to protect and connect the information assets for enterprises, financial services companies and content and network providers, primarily in the Americas, Europe, the Middle East, Africa and the Asia-Pacific.
Equinix 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.

Investors receive a 1.50% distribution. Goldman Sachs has trimmed its $925 target price on Equinix stock to $900. That is still above the $884.04 consensus target. Shares closed at $763.45 on Wednesday.
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SBA Communications

This company continues to find solid growth opportunities. 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.

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.

The analysts are very positive and noted this when discussing the potential for the company:

SBAC has the highest exposure to domestic tower leasing activity, which we believe is set to accelerate. SBAC has the highest mix of its revenue coming from domestic tower leasing among the three public tower operators. For example, domestic tower leasing generated 73% of the company’s consolidated revenue as of the second quarter versus 60% at CCI and 54% for AMT. As such, we believe that SBAC is well positioned to benefit from an acceleration in US tower leasing, as carriers begin to deploy their C-Band spectrum on macro-towers, Dish accelerates its network build to meet its 20% coverage deadline by June 2022 and Verizon and AT&T work to close the 5G gap with T-Mobile (which has been deploying low- and mid-band spectrum at a rapid pace).

Investors receive a 0.70% distribution. The $375 Goldman Sachs price target compares with the $369.89 consensus target. Wednesday’s closing print for SBA Communications was $326.70 per share.

All the stocks in this segment have had a powerful run over the past few years but have backed up nicely, offering long-term investors much better entry points. The demand growth should remain for years, and these top companies will continue to lead the way. With that in mind, it may make sense to buy partial positions in front of the earnings and see how the shares react. Also note that all three companies are real estate investment trusts, so distributions may contain return of principal.

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