Valuation Stretched; Small Cells Could Pose Risk

The recent bout of market volatility calls for high-quality defensive dividend payers like American Tower (AMT). Though shares are down 10% from all-time highs, they still seem relatively expensive in a market that could be more rewarding to the beaten-down risk-on plays. Further, there is a risk that small cells could displace towers in the distant future.

With an elevated risk of recession, such defensive, low-beta stocks with durable dividends have been in high demand. The real risk for jittery investors may lie in overpaying for defensive stocks that would have traded at a more modest multiple during normalized times. The first half of 2022 was treacherous, but the first month of the second half has been encouraging.

The overall market ended July with a big gain, thanks to better-than-feared results from various influential companies like Amazon (AMZN) and Apple (AAPL). Should such influential earnings induce a risk reversal in the market, it’s the frothy defensive stocks that could find themselves on the receiving end.

American Tower Has Been Quite Steady

American Tower has been holding its own remarkably well amid the overall market sell-off, with a stellar second-quarter earnings beat last week, pole vaulting over the EPS consensus by nearly 40% ($1.95 versus $0.96).

The business of cell towers has been incredibly lucrative. With the 5G transition ongoing, American Tower still feels a strong wind to its back. Further, the company’s management team has made the most of its fortunate positioning.


At over 12 times sales and 45 times trailing earnings, though, investors will be paying up a hefty price of admission with the name.

Sure, American Tower’s promising fundamentals warrant a premium, especially in this environment. However, with such a minimal (or non-existent) margin of safety at these prices, I’d argue it’s a far better idea to take a rain check.

In the meantime, I’m staying neutral on the stock.

A Shift to Small Cells from Towers Could Weigh on American Tower

Despite being on the right side of a strong and long-lived secular trend, American Tower could face a bit of disruption with the 5G realm in the latter part of the decade as small cells become more common.

It’s unclear whether small cells represent the next big frontier in 5G infrastructure. Small-cell rollouts are incredibly expensive, with questionable returns on invested capital.

Even if small cells affect carrier demand for towers, it’s unlikely that small cells will end up replacing towers, especially in hard-to-reach suburbs. Only in relatively dense urban environments do I see small cells potentially edging out towers in the near future. At the end of the day, cell towers are just more economical for most.

That said, it’s unwise to dismiss the longer-term disruptive potential of small-cell technology.

The small-cell market will evolve through the decade to keep up with the appetite for faster and lower latency data. Undoubtedly, the rise of mixed reality, on-the-go video-game streaming, IoT (internet-of-things), and connected vehicles could tilt the odds in favor of small cells over towers.

Cell tower rival Crown Castle International (CCI) has been betting big on a small-cell future, with 5,000 small cell nodes to be deployed this year and more than 10,000 coming beyond 2023.

Undoubtedly, small cells are an exciting but slightly riskier business to get into. American Tower is sticking with cell towers for the time being. The returns have been quite impressive thus far. In any case, I wouldn’t rule out a move into small cells in the future should the market offer a better bang per invested buck.

Indeed, American Tower seems to be a bet on the present, while Crown Castle looks to be more of a bet on the future. Personally, I prefer the latter.

Wall Street’s Take on AMT Stock

Turning to Wall Street, AMT stock comes in as a Strong Buy. Out of 11 analyst ratings, there are nine Buys and two Holds.

The average American Tower price target is $294.73, implying upside potential of 9.7%. Analyst price targets range from a low of $252.00 per share to a high of $315.00 per share.

Conclusion: AMT is Steady but May Not be Worth It

American Tower is a steady dividend payer (2.1% yield) with an attractive growth profile. Still, the valuation seems a tad stretched after the first-half rush to “Steady Eddie” companies. The potential disruption from small cells should also be carefully considered by investors.

Disclosure