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American Tower Corporation (NYSE:AMT) is a REIT that owns and operates a global portfolio of wireless and broadcast communications properties. AMT’s core business is leasing space on its towers to wireless carriers, broadcasters and other tenants to provide critical infrastructure for their networks. In recent years, AMT has expanded its footprint through acquisitions of companies that own and operate data centers, expanding its reach into the fast-growing cloud computing and digital infrastructure sectors.
While AMT has a strong competitive position and attractive growth prospects, I think the shares are slightly overpriced. Despite the recent market turmoil caused by the COVID-19 pandemic, AMT has demonstrated resilience and stability, maintaining its dividend payments. In this article, I will analyze AMT’s business model, growth prospects, financial health, and valuation.
AMT’s business model is straightforward and extremely effective. The Company owns and operates a global network of wireless and broadcast communications sites including macro towers, rooftop sites and small cellular sites. These locations provide critical infrastructure for wireless carriers, broadcasters and other tenants, enabling them to provide voice, data and video services to their customers. In return, AMT earns recurring revenue from lease payments, which are typically long-term contracts with built-in escalators. At the end of 2022, AMT had more than 225,000 communications sites in 19 countries, making it one of the largest tower companies in the world.
AMT’s core business has significant competitive advantages. I believe the company’s size, global footprint and customer relationships provide a strong competitive advantage that protects its market share and pricing power. In addition, AMT’s towers are strategically located in dense urban areas and along major transportation routes, making them highly desirable locations for wireless carriers and other tenants. AMT’s focus on network densification, which involves increasing the number of cell sites and the number of devices on each tower to improve network capacity and coverage, has also created strong tailwinds for the business. As wireless data usage continues to grow, carriers are increasingly relying on tower companies like AMT to provide the infrastructure they need to meet customer demand.
AMT’s growth prospects are attractive, driven by secular trends of increasing wireless data usage, network densification, and the advent of 5G technology. I expect these trends to continue to drive demand for tower infrastructure as carriers invest in their networks to deliver higher speeds, lower latency, and improved coverage. Additionally, AMT’s expansion into the data center sector offers a new growth path as the shift to cloud computing and digital transformation fuels demand for data storage and processing.
AMT’s recent acquisition of CoreSite Realty is a strategic move into the data center space. The acquisition adds 28 data centers across North America to AMT’s portfolio totaling over 4.7 million square feet and provides the company with a new growth platform and complementary capabilities to its tower business. While the integration of the two companies will take time, I believe the combination of tower and data center facilities has the potential to create significant synergies by creating a complementary link between data centers and AMT’s existing communications sites.
Expanding its data center footprint through acquisitions
AMT has actively expanded its presence in the data center industry through the acquisition of companies that own and operate data centers. In 2021, AMT acquired CoreSite, a $10.1 billion data center management company, and DataSite, a data center owner-operator, adding two new sites to its already impressive portfolio of collocation facilities.
Additionally, in 2019, AMT also acquired Colo Atl, a colocation and interconnection provider in Atlanta, Georgia. Additionally, in 2022, AMT recently entered into a strategic partnership with Stonepeak, a leading alternative investment firm specializing in infrastructure and real estate.
These acquisitions and partnerships demonstrate AMT’s commitment to expanding its data center portfolio and providing best-in-class colocation facilities to its customers. With its growing presence in the data center industry, AMT is poised to become a major player in the global data center market.
AMT has a record of profitability and manageable debt levels. This has helped them deliver consistent and steady revenue and cash flow growth over time thanks to the recurring revenue model and long-term contracts. AMT’s revenue has grown from $3.4 billion in 2013 to $10.7 billion in 2022. During the same period, their AFFO grew from 1.5 billion to 4.5 billion.
AMT has averaged a 27% ROE over the past decade. This shows that they have consistently succeeded in using shareholder funds to generate profits.
However, the move to data centers has increased the company’s financial risk. Leverage is still lower than SBA Communications (SBAC). AMT’s net leverage is 9.5x AFFO, while SBA’s is 11.5x.
In my opinion, the current stock price is a bit inflated compared to the company’s performance, historical multiples and peer comparisons. To back this up, I looked at historical data and found that shares have traded at an average of 31.3x AFFO over the past decade. SBA shares are currently trading at 31.9x AFFO.
Given the company’s forecast of a modest decline in AFFO, I see downside risk of around 2% to 5% if shares trade at the same multiples of SBA or historical levels.
For shares to trade above $250, the multiple needs to trade at 2019 levels. But I see no clear trigger to justify such an increase in multiples. So I think this scenario is unlikely.
The telecom industry is highly regulated, which poses a risk for AMT. Nonetheless, the company has an experienced management team that has previously grappled with similar challenges, and its widespread footprint and diverse customer base help mitigate the risks associated with any given region or market.
AMT’s leverage increased slightly following its acquisition of CoreSite. However, the company has a track record of effectively managing its finances, including its debt.
I believe AMT is a well run company with solid growth prospects. Increasing demand for wireless infrastructure and data centers, combined with AMT’s global footprint and diversified customer base, provides a strong foundation for long-term growth. However, at current levels, I see AMT shares as slightly overpriced.