- Wells Fargo's top themes for the communications infrastructure/telecom services space for the coming year draw on a few trends coming to the forefront, centered on the increasing need for solid infrastructure.
- That's become more important than ever, the firm notes, establishing secular demand tailwinds for data centers, cell tower owners and fiber-optic cable providers.
- Prominent in its list of themes for 2021 is the ongoing battle for C-Band airwaves, which is set to strain some balance sheets. AT&T (NYSE:T) is reportedly talking with bankers to borrow $14B to spend in a 5G spectrum auction that was once estimated to land at $47B total, but has surpassed $80B.
- Wells Fargo expects total proceeds to hit about $97B, and that Verizon (NYSE:VZ) will spend $34B, AT&T $19B and T-Mobile (NASDAQ:TMUS) $6B. AT&T and Verizon will have to borrow (there's those strained balance sheets) to catch up on spectrum, while T-Mobile will still have about 1.6 times the others' low- and mid-band holdings after the auction, it says.
- On the COVID-19 reopening front, it says three areas that were adversely affected in the pandemic should start to reverse this year: Wireless phone volumes will pick up somewhat; Enterprise/SMB spending on telecom should "broadly" improve; and Media/Advertising businesses should recover. Its favorite names in the reopening trade are Iron Mountain (NYSE:IRM), Lumen Technologies (NYSE:LUMN) and Cogent Communications (NASDAQ:CCOI).
- Another theme it visits is whether streaming's late (but heavyweight) entrant HBO Max can make 2021 its year. It now sees the service hitting 43.3M subscribers by year-end, up from a previous 41.3M. "However, we see longer-term churn risk from its theatrical release-to-OTT strategy from a subs perspective, while we also forecast ~$1.3B of “forgone” box office revenue at Warner Bros."
- And as for secular tailwinds for infrastructure: The bank is expecting data center bookings "relatively in line" with a record fiscal 2020, with strong first-half hyperscale leasing and improving enterprise demand in the second half. In towers, "we believe investors will quickly look toward fiscal 2022 once the C-Band auction concludes, where C-Band lease commencements should drive a ~50 bps growth accelerations."
- Its top pick among the data centers is CyrusOne (NASDAQ:CONE), where it expects leasing growth to feed EBITDA growth scaling to 10%-plus. It's the best relative value trade in the space, it says, trading at a 2-5x discount to peer multiples for EBITDA/adjusted funds from operations.
- For towers it likes SBA Communications (NASDAQ:SBAC): While numbers have come down, "we see SBAC as a beat-and-raise story in '21 (buoyed by share repurchases), and a growth acceleration story into '22." C-Band will ultimately be deployed on macro towers, but it doesn't expect those airwaves to be a major growth contributor this year.
- And its top wireless pick is T-Mobile (TMUS), which it expects to take about 62% of postpaid phone net add share this year as it presses a 5G coverage advantage (along with a two-year head start in a nationwide mid-band network).