Anyone who has tuned into Jim Cramer on Mad Money recently has probably heard one of his most prominent investment theories right now: mobile internet technology will shape our future. He compares the impact of the mobile internet tsunami to the advent of the internet itself or the personal computer (The Smart Phone Revolution Continues). On Thursday’s Mad Money, Cramer turned his attention to the companies that will be tasked with keeping the wireless networks able to handle the increased demand.
“Read an article from The New York Times about how the iphone is overloading the AT&T cellular networks. It takes up ten times the capacity of even the average smart phone user, causing dropped calls and slower download speeds, which is a big reason AT&T plans to spend most of its $18 billion capital expenditure budget in 2009 on upgrades and expansions to its network…Erecting an additional 2100 cell towers to boost coverage.
AT&T is not alone here. Verizon is building out its own ultra fast network in 2010. Dollars in the pot. And don’t forget, when AT&T’s iphone agreement with Apple expires, possibly as soon as next year, this data-hogging smart phone will come to other carriers, causing them to spend still more on wireless infrastructure to support Apple’s data hog.
So who wins from this wireless infrastructure shortage? Who benefits from all this spending by the carriers? This is a side the mobile internet tsunami that frankly I haven’t spent much time talking about, but I think the gains here could be multiyear, and I think the gains could be major. When you look at where most of the problems were occurring and where most of the carriers are making their investments, it looks like the big bottleneck is in the mobile towers…” — CNBC’s Mad Money 9/10/2009
Cramer discussed three companies that build out wireless networks. There are the two industry giants American Tower (AMT) and Crown Castle International (CCI), which are sure to get some nice business thrown at them by the carriers. Cramer also said that investors should pay more attention to cash flow figures instead of just stated earnings, as this shows the fundamental strength of these companies more appropriately. However, the stock that really fascinated Cramer is a smaller competitor called SBA Communications (SBAC).
SBA Communications has less than half the number of towers that AMT or CCI have, but they are growing. They receive 80% of their revenue from leasing antenna space on their towers, and Cramer likes the operating leverage in this sort of business. He notes that once the tower is up, it is inexpensive to add additional antenna. The rest of their revenue comes from consulting and construction services, where they are hired by wireless carriers. This sort of consulting business could be a boon to the company with such aggressive expansion from the carriers.
According to the Ockham methodology, we see SBA Communications as the most Undervalued of the bunch. The company is not making positive earnings at this time, but the cash flow has been growing impressively. Revenue is growing at a 17% rate this year and will continue to grow albeit slightly slower over the next few years. The bottom line is this, if you believe that Cramer is correct about the mobile internet tsunami, then you must believe that these wireless infrastructure companies will continue to be in high demand. Networks are already showing signs of strain, and we believe that the need will continue to grow.
