Investment Thesis: SBA Communications Corporation (NASDAQ:SBAC) could see upside as wireless infrastructure demand continues, especially given the rollout of 5G.
SBA Communications Corporation has seen significant growth over the past two years, with home-based wireless consumption having increased significantly throughout the pandemic.
The purpose of this article is to assess the extent to which the stock could see upside from here.
As an REIT stock, SBA Communications Corporation derives its revenue from the leasing and development of sites with developed wireless infrastructures.
We can see that excluding FX, site leasing revenue was up by nearly 10% while site development revenue was up by 30%.
As a capital-intensive business – SBA Communications Corporation needs to invest significantly into site acquisition in order to maintain its business. From this standpoint, it would make sense that the cash to long-term debt ratio would be lower than what one might expect across other industries.
However, we can still see that over the past five years, the company’s cash as a proportion of long-term debt has still grown:
|Cash and cash equivalents||68783||143444||108309||308560||367278|
|Long-term debt, net||9290686||8996825||9812335||11071796||12278694|
|Cash to long-term debt ratio||0.74%||1.59%||1.10%||2.79%||2.99%|
Source: Figures sourced from 2018-2021 Q4 Reports. Cash to long-term debt ratio calculated by author.
In addition, when looking at total site leasing tower cash flow, we can see that growth has remained steady over the past six years.
For instance, here are the year over year growth rates as recorded in Q4 from 2016 to the present:
In this regard, cash flow generation from leasing towers has continued to remain vibrant and has not showed signs of slowing over the past six-year period.
Of course, no company is without risk and SBA Communications is not an exception. Specifically, with Verizon (VZ), AT&T (T), and T-Mobile (TMUS) being the company’s three largest customers – SBA Communications could face significant revenue loss if one of these customers decides to significantly reduce wireless expenditure.
In addition, telecommunications operators have traditionally seen a significant portion of their revenue from non-wireless sources, such as international roaming revenue – which had declined during the pandemic. However, with global mobility on the rise once again – there is the risk that demand for wireless infrastructure may be peaking and we could see growth start to plateau from here.
However, even as use of non-wireless sources starts to rebound – I do not foresee that this will have a particularly negative impact on demand for wireless sites. For one, the cost of switching sites can be substantial for an operator – therefore deterring high levels of lease terminations. In addition, with Ericsson determining that mobile data traffic could increase by over 4.5 times from current levels through to 2026, there will be a growing need for site operators to expand network capacity to support 5G technologies.
From this standpoint, the main growth drivers for SBA Communications appear to hold up at this time. Moreover, even with inflation potentially increasing the cost of mobile tower leases for operators – the high barriers to entry and long contract rates of between five to fifteen years means that the telecom industry as a whole is not as affected by inflationary concerns as other industries might be.
To conclude, SBA Communications seems to be in a good position to thrive in an inflationary environment and continue to grow revenues. From this standpoint, I anticipate that the stock could rebound to a prior high of just under $400 when market sentiment becomes less bearish.