Telecom tower giant SBA Communications (NASDAQ:SBAC) has managed to sustain its unwavering growth, despite the challenges most REITs are facing these days. However, there’s a catch – the stock is currently priced to perfection, which means there may not be much room left for upside, leaving little wiggle room for those already invested. It’s hard to say for sure whether the potential rewards are worth the valuation risks attached, given the lack of margin of safety the stock offers. Accordingly, I am neutral on SBAC stock.
In this article, we will:
- Examine what drives SBA Communications’ robust growth
- Discuss the company’s most recent results and future prospects
- Review the stock’s valuation
What Drives SBA Communications’ Robust Growth?
SBA Communications has maintained vigorous revenue growth over the years. Following another year of excellent growth in 2022, SBA’s 10-year compound annual revenue growth rate stands at 10.7%, which is outstanding given that the company has been around for quite some time. Its public listing goes all the way back to 1999.
But what is it that drives SBA’s consistent growth over the years? Well, it’s the unique set of qualities attached to the company. Let’s dive a bit deeper into this. Imagine you’re a telecommunications company, and you need to grow your coverage network. To do so, you need specialized infrastructure to keep your signal strong and reliable. That’s where SBA Communications comes in. They’re one of only a few companies in the game, and they’re crushing it!
Favorable Market Structure Dynamics
To begin with, SBA enjoys a notable advantage in the telecommunications tower industry due to its favorable market structure dynamics. It is an oligopolistic industry, which limits the number of competitors in the space.
Additionally, the industry is capital-intensive, which demands a continuous flow of capital for companies to keep expanding their tower network in line with the growth in demand. The market’s high CapEx requirements make it virtually impossible for smaller players to compete with industry leaders like SBA. This translates to a huge advantage for the company in terms of dominating the market, generating growth, and ensuring reliable revenues.
Tenant Dependancy
However, that’s not the only thing driving SBA’s success. The company also benefits from superior tenant dependability, thanks to its impressive roster of clients that includes all the major players in the telecommunications space.
Basically, SBA faces none of the occupancy or rental collection issues that plague other REITs in the current market landscape. With telecommunications being an essential service, SBA’s tenants prioritize fulfilling their lease obligations, providing the company with a dependable stream of revenue.
Lack of Correlation to the Real Estate Market
Moreover, SBA’s tenants are publicly-traded companies with transparent financials and resilient cash flows. This allows SBA’s performance to be mostly uncorrelated to the rest of the sector. Unlike many of its peers in other REIT areas, SBA’s results have not been affected by the myriad of factors currently afflicting the sector.
Retail REITs, for instance, are struggling with foot traffic issues. Commercial REITs face low occupancy rates due to hybrid working conditions. Then, residential REITs are grappling with declining home prices. SBA doesn’t have to bother about any of that. All they have to do is acquire and develop telecom towers at decent prices and lease them out to the telecom giants who strive to expand their 5G coverage at attractive rates.
Q4 Results: Steady Progress in a Turbulent Sector
As mentioned, SBA’s results tend to be uncorrelated to the underlying turbulence the real estate sector is facing. In its most recent Q4 results, the company was once again able to record steady progress.
The telecom tower giant reported an outstanding $686.1 million in revenues, marking a substantial 15.3% year-over-year increase. It also marked a new record in terms of quarterly revenues.
This achievement is a testament to SBA’s unwavering commitment to expanding its tower network and securing lucrative leasing agreements. In Q4 alone, the company acquired a staggering 2,642 communication sites and built 162 towers, cementing its position as a formidable industry player.
Strong top-line growth led to solid adjusted funds from operations growth as well. Specifically, on a per-share basis, AFFO rose by 11% to $3.12, driven by improved margins and a lower share count, aided by SBA’s share buybacks.
For the year, AFFO/share hit another record of $12.25, up 14% compared to 2021. Only a handful of REITs have managed to record double-digit bottom-line growth this year, which is a testament to SBA’s overall qualities and strengths. Also, most REITs tend to report humbler per-share growth metrics, even when revenue growth is strong, due to dilution. Yet, SBA self-funds its growth and even buys back its own stock.
Thus, it’s no wonder management’s guidance for 2023 suggests SBA is well-positioned to continue delivering growing results. The company now expects 2023 site leasing revenues to be between $2.469 billion and $2.489 billion and AFFO/share to land between $12.46 and $12.83.
Is SBAC Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, SBA Communications has managed to maintain a Strong Buy consensus rating based on 10 Buys and two Holds assigned in the past three months. At $329.73, the average SBAC stock price target implies 27.4% upside potential.
Takeaway – Is the Stock’s Premium Valuation Justified?
Despite SBA Communications’ growing financials and corrected share price, the stock appears to still be trading at a premium valuation. Shares have declined by about 13.9% over the past year, and meanwhile, SBA’s guidance points toward another year of record AFFO/share. Yet, SBA is still trading at a hefty 20.5x multiple of management’s AFFO/share outlook (at the midpoint).
The company has distinct qualities and a strong growth trajectory that cannot be disputed. However, in my opinion, investors are currently overpaying for the stock. The recent increase in interest rates may cause the valuation multiple of shares to be compressed in the short term, which may have an impact on the company’s future total returns.
Overall, the stock is currently priced to perfection, meaning there is little room for error, leaving investors with no margin of safety.
