Surging data usage powers demand for wireless tower stocks

Rising mobile data usage around the world is signaling a compelling investment opportunity in wireless communication towers, says Fidelity's Pranay Kirpalani.

• Companies specializing in providing the infrastructure supporting wireless communication—often referred to as tower companies—are the primary beneficiaries of rapidly rising mobile data usage, as well as the expansion of 5G networks, says Fidelity Portfolio Manager Pranay Kirpalani.
• "As data usage grows and more devices are connected to the internet, telecom companies will seek to densify and strengthen their networks, providing a source of steady demand for tower companies," says Kirpalani, who manages Fidelity^® Infrastructure Fund. "These companies are well-positioned to experience long-term structural, organic growth."
• In helming the global equity strategy since its inception in 2019, Kirpalani emphasizes best-of-breed infrastructure-related companies he believes can grow earnings and dividends for the next five to 10 years. A core part of his investment strategy is to choose shares of firms that form the "infrastructure backbone" of the most influential, multidecade trends, including artificial intelligence, renewable energy, e-commerce, 5G networks and cloud computing.
• Cell towers fit squarely into Kirpalani's investment focus, as they provide the infrastructure for mobile-data usage, serving as the touchpoints to create dense wireless networks, Kirpalani explains. Demand for wireless coverage has intensified in recent years due to increased data usage from mobile internet use, driven by web browsing, social networking, mobile messaging, VoIP calling, file sharing, video viewing and e-commerce, he says.
• Data traffic is expected to compound at a 25% annual growth rate over the next five years, which will drive the need for denser and more sophisticated mobile infrastructure networks, Kirpalani underscores.
• He considers tower companies Cellnex Telecom of Spain and Boston-based American Tower—each a large fund holding and notable overweight versus the fund's infrastructure benchmark as of September 30—to be best-in-class firms that are advantaged in the long term and also able to largely weather the current inflationary environment.
• According to Kirpalani, these companies' business models employ multiyear, long-term contracts, which often create visibility into cash flow, a solid indicator of growth and an important consideration in his investment process.
• These contracts also include annual pricing escalators and inflation-linked pricing, which is especially appealing when inflation is rising quickly or, as has been the case in the U.S., when inflation proves to be quite stubborn, according to Kirpalani. The businesses also maintain a cost base that can be managed below headline inflation—another positive factor, in his view.
• "As mobile devices and wireless connectivity become universally ubiquitous, the need for dense networks relying on towers becomes even more vital," Kirpalani concludes. "Towers provide the necessary infrastructure for wireless companies to satisfy surging consumer demand for fast, low-latency wireless service that requires a dense network. As such, these drivers provide a long runway for growth for certain well-positioned tower companies."