SBA Communications Corporation (NASDAQ:SBAC) beat estimates and is on the verge of a growth phase. With the advent of 5G wireless technology, SBAC and its competitors will have to increase the number of sites exponentially.
It will also have to utilize more non-tower sites to meet the requirements of 5G. However, as SBA Communications stock begins a new phase as a real estate investment trust (REIT), investors who buy now will have to buy in at a high valuation without receiving a dividend for the foreseeable future.
SBA Communications Stock Beat Estimates
For Q4 2017, the company earned $443.1 million in revenue, beating consensus estimates by $6.64 million. This represents a 6.4% year-over-year increase from the 4Q 2016 revenues numbers.
However, its income, 6 cents per share, rose from the 4-cent per share level reported in the last quarter of 2016. When adjusted for non-recurring gains, SBA Communications earned 23 cents per share, a figure higher than the 18 cents per share expected by Wall Street.For 2017, the company reported annual profits of 86 cents per share on $1.73 billion in revenue. Earnings per share (EPS) increased 40% from 2016 when the company earned 61 cents per share. Despite the increased earnings, SBAC stock fell in opening trading the next day.
To be sure, SBA has turned around. The company, which has endured annual losses for several years, now turns a profit. Moreover, analysts forecast a very high level of earnings growth. In 2017, SBAC stock became a REIT. REITs typically pay out 90% of their net income in dividends.
Still, because of capital loss carryovers from operations over the last few years, SBA Communications stock will not pay shareholders a dividend for an estimated three to four years.
Moreover, current earnings levels place the price-to-earnings (PE) ratio at over 200 times earnings. Although earnings growth should bring this down in future years, few REITs support valuations at these levels. Investors have seen this coming since late 2016 as all tower companies have seen stock price increases.
SBAC 5 G Profits and Challenges
The Boca Raton, Florida-based communications faces an interesting challenge. Wireless device use is as high as ever. Also, the failed merger between T-Mobile US Inc (NASDAQ:TMUS) and Sprint Corp (NYSE:S) removed a potential catalyst to cancel tower leases.
AT&T Inc. (NYSE:T), Verizon Communications Inc. (NYSE:VZ), T-Mobile, and Sprint, which provide 80% of SBAC’s domestic revenue, will need SBAC and its competitors to make 5G possible. However, the advent of 5G will bring both increased opportunity and challenges that will fundamentally change the communications tower industry.
Unlike previous generations, 5G will rely less on towers. Due to the level of coverage 5G provides, it requires the installation of dozens of cells to cover a neighborhood. These cells will more likely reside on structures such as light poles or buildings. Most devices will access the signal from small cells placed at low altitudes.
Towers will still play a part as they serve as aggregation points to carry signals. And many can still provide 5G signals directly. Still, tower companies will have to play a more significant role in small cells, which can be just as challenging to build and offer lower rates of return.
Final Thoughts on SBA Communications Stock
Investors who buy SBA Communications stock today face high valuations without the dividends expected from a REIT. SBAC will certainly benefit from the advent of 5G as all of its four largest clients must upgrade to remain competitive.
The earnings growth reported in this quarter, as well as predictions for future quarters, indicate a bright future for the company.
Moreover, while investors will miss out on dividends for a while, keeping more cash should bolster SBAC’s balance sheet. The problem now lies in the valuation, which stands at over 200 times earnings. While the rise of 5G makes its industry a good bet, investors should not try to upgrade their portfolios with SBA Communications stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.