By Jennifer M. Fritzsche, Senior Analyst, Wells Fargo Securities, LLC.
Welcome 2018! What will it bring? To quote Heraclitus – “Change is the only constant in life!” This same quote could be applied to the telecom sector as well, as we expect 2018 to mark much of this change and evolution. In the below discussion we identify what we see as the key themes to watch for 2018.
- (FOR NOW…..) A More Rational Wireless Pricing Environment with four National Carriers – Carriers seem to recognize that cash needs to be generated in order to invest back into the network. And to do this – the pricing lever cannot be pulled in too dramatic a way.
- Towers and Data Centers Remain An Important Part of This Infrastructure Theme – The towers subsector was one of the strongest under our coverage in 2017. Despite the growth seen in 2017, we see a number of tangible catalysts (i.e.: FirstNet, 5G densification, TMUS 600 MHz rollout etc.) – mostly centered around U.S. – which should lead to an improved top line picture for the towercos in 2018. On data center side, data center fundamentals still appear very healthy, in our view, as elevated supply in certain markets continues to be quickly absorbed by record demand funnels, pricing dynamics remain rational and preleasing has limited speculative capacity.
- The Hype Around 5G Slowly Turning into a Reality – In our view, 5G will be a next generation mobile networking standard that will bring lower latency and higher throughput (multi-Gbps) to mobile networks. In 2018, we expect several major developments in the evolution from 4G to 5G: initial 5G “fixed wireless” deployments, the release of 3GPP Release 15 standards in early-to-mid 2018 for 5G radios and an acceleration in infrastructure investment to both densify 4G networks and prepare for broader mobile 5G adoption.
- Telecom, Media and Content Lines Continue to Blur – The lines between telecom and media are blurring as video and content consumption shift toward mobile devices. The potential T / TWX merger has forced a reaction from the other three national carriers to get in the content game in some way shape or form.
- Enterprise: Technology Transition Presents Potential New Headwinds for Incumbents – Enterprise platforms such as SD-WAN and other technologies are disrupting the incumbents’ powerful hold on the industry and puts revenue from low-bandwidth, high-cost T-1 circuits somewhat vulnerable. We expect this to accelerate in 2018.
- 5G Brings a Potential Golden Era for Communications Infrastructure – In 2018, we expect to continue to see elevated capex investment in fiber, data centers, towers and small cells, especially as we head to the 5G era. We also anticipate M&A interest will remain quite high among all aspects of the infrastructure space, with valuations well into the double-digits and interest across both strategic and financial buyers.
January 5, 2018