The Wireless Tech Boom No One Is Talking About
Hindsight is 20/20. Investors always lament missing the boat on the next big craze that mints a long line of millionaires.
If an investor could jump into a time machine and travel back in time, perhaps 20 years or so, one of the surest and fastest ways to make it rich would be to bet on wireless technology. Few people had cell phones at the time - now everybody does. Some visionary people made a fortune through wireless technology, but the cellular market in the U.S. is now saturated; that ship has sailed. In focus today American Tower Corporation (NYSE: AMT), TIM Participações S.A. (NYSE: TSU), Regal Beloit Corporation (NYSE: RBC), Verizon Communications Inc. (NYSE: VZ), América Móvil, S.A.B. de C.V. (NYSE: AMX).
But that isn't true everywhere. Only a fraction of the world has access to the global communications network in this way. In South America, the wireless market is just getting going, and there are still millions to be made.
One small-cap company is making moves that should raise some eyebrows, and has potential to do very well.
Tower One (TO; TOWTF) just announced that it has signed a Letter of Intent to acquire a Mexican private Tower Company, which owns, builds and leases cellular towers to the telecom industry in Mexico. The company also happens to have a Master Lease Agreement (MLA) with AT&T, allowing it to be granted direct Build-To-Suit opportunities.
Cellular towers might not seem like the sexiest growth market, but the profit potential is massive. In Latin America, where cell phone use is low by U.S. standards but is experiencing rapid growth, cell tower operators are at the forefront of a gold rush. They build the towers and lease the coverage to cell phone companies. With demand rising quickly, it is almost a matter of "if you build it, they will come."
Alex Ochoa, CEO of Tower One, spoke of the significance of the Mexican acquisition. "This acquisition is a great addition to Tower One's multi-regional strategy. It gives us the opportunity to add additional infrastructure to our existing portfolio in Argentina and Colombia. Since going public by reverse merger in Q1 2017, the company has now initiated our expansion program into these three countries."
The news might seem innocuous at first, but it is a sign that the company is positioning itself for major inroads into the Mexican market. And the opportunity is huge. AT&T has already announced plans to invest as much as $3 billion in upgrading the Mexican network, opening up coverage to 100 million people by next year, double the current reach at just 51 million users. Tower One is positioning itself to profit from this explosive growth.
But that is only the latest news from this small company. Looking deeper, there are several reasons why investors need to pay attention to Tower One.
#1 Hot growth market
According to a Mott MacDonald study on South America's Cell Tower Investment Opportunity, growth in wireless tech is set to surge, meaning there is massive demand for cell towers. By 2020, South America will need 520,000 cell towers to meet the needs of the market, but there are only 100,000 right now.
Tower One (TO; TOWTF) estimates that it could earn $180,000 from each tower. Because the industry could build more than 400,000 towers by 2020, a back of the envelop calculation suggests that the market for cell towers in South America could be worth $75 billion. In other words, the market is set to quintuple in just a few years, which could lead to windfall profits for the few companies that control the towers.
In a lot of ways, it is like a landlord in a white-hot real estate market. If everyone wants to live in a desired area that has a shortage of living space, there is a high premium on any house or apartment, lining the pockets of the landlord. In the cell tower business, the tower owner leases out space, and each tower can service up to four telecom companies. And because wireless usage is growing so quickly in South America, companies like Tower One are scrambling to build as many towers as possible to cash in.
#2 Huge profit opportunity
The profit opportunity is very straightforward. Each tower can generate between $12,000 and $15,000 per year per operator, after the initial $50,000 to $100,000 investment to build the infrastructure. As such, the tower just about pays for itself after a few years, and thereafter the margins should be huge.
Cell towers offer 80 percent EBITDA margins. There are few industries with such high margins and investors would be hard pressed to find that elsewhere.
Tower One believes it will need to raise $5 to $10 million to finance the construction of the next 200 towers. But after that, the company will be generating enough cash to self-finance its ambitious growth plans.
#3 Early cash
Not only does Tower One (TO; TOWTF) expect to generate enormous returns for years to come, but investors won't have to wait decades to see returns. The tower business generates a wave of cash in short order.
A tower can be built in just one month, and a cell operator can be brought online two weeks later. Better yet, customers ink deals for 10 or 20 years, locking in rock-solid revenue streams for decades. In other words, 45 days after you break ground, you are generating cash…for the next two decades.
The company currently has 15 towers, with 20 more on the way. But because Tower One is moving quickly, sensing that time is of the essence, it has ambitious growth plans. By the first quarter of 2018, Tower One is planning to have 100 towers in operation. A year later, that figure is planned to triple to 300 towers.
Tower One could theoretically earn $180,000 on each tower it builds over a three-year period.
Put that altogether, and it should add up to a valuation that is much larger than its current market cap of just $19 million!
#4 A small-cap in a market with few pure-play competitors
For investors looking for an entry point, there are only four publicly-traded cell tower companies in the world. Three of them, however, are large and mature, offering little more than stability for investors trying to get in on the action.
But the fourth is Tower One (TO; TOWTF), a small-cap company established in this business in 2017 and currently valued at just $19 million. It is the only small-cap cell tower company that can offer investors a way in.
Tower One's older and larger competitors built hundreds of thousands of cell towers, minting millionaires along the way. SBA Communications, for example, handed shareholders a nearly 45,000 percent return over ten years. The three cell giants have a combined market cap of $100 billion.
Tower One is hoping to repeat this success story in South America. Better yet…and this is important…while Tower One's larger competitors control the North American market, they do not yet have a head-start in South America. They are all pretty much starting from scratch, which means the small-cap Tower One could see large growth, even if only captures a fraction of the market.
#5 Executive team stacked with heavy hitters
Tower One (TO; TOWTF) is headed up by Alex Ochoa, who has a long track record of success and has created billions in shareholder value. He recently left Mackie Research Capital, one of the top institutional brokerage firms in Canada.
Also on the team is Rolland Bopp, who should be recognizable to those familiar with the telecom industry. He is the former CEO of Deutsche Telekom USA, a company now known as T-Mobile.
But the exciting thing about Tower One right now is that 60 percent of the company's shares are held by the company's management, which means they will laser focus on shareholder value. Investors who get in early can be assured that management is just as motivated as they are for success.
In short, massive growth in the cell tower business is what everyone is predicting for South America, potentially offering returns to shareholders that are as predictable as they are substantial, and Tower One is the only small-cap company that offers an entry point for investors.
Other companies to watch in the space over the coming months:
American Tower Corp. (NYSE: AMT) American Tower is beating competitors when it comes to being able to handle 5G technology, the future of mobile. This giant has handed investors returns of over 8,000 percent since the wireless revolution started and it continues to pay a handsome dividend .
As mobile data demand continues to grow, and U.S. consumers now use some 400% more data than they did three years ago, American Tower Corp. is well positioned to upgrade its cell towers to the newest technology in order to provide the best service. Because of its expertise and size, it can do so faster than any of its other major competitors.
TIM Participacoes S.A. (NYSE: TSU) This stock has been a huge mover lately. TSU (or TIM Brasil) covers Brazil with cellular service, with help from two subsidiaries. It's the biggest system operating in the country and has over 51 million subscribers. It's also the Brazil subsidiary of Telecom Italia.
TIM Brasil closed the first quarter 2017 with over 61.9 million mobile lines. It also gets to boast being the first mobile operator deployed in every single state in Brazil, giving it a clear growth advantage. It's now THE Number 1 provider of 4G coverage in the country and it's 4G and fiber networks cover nearly 71,000 square kilometers.
Regal Beloit Corp (NYSE: RBC) Since we're already thinking outside the box in the wireless space … This is another lesser-known part of the equation that makes the wireless revolution possible-direct current (DC) power systems.
And they are experiencing massive growth thanks to the exploding hunger for mobile and fixed broadband networks around the world. The next big way in the telecoms industry is 5G networks, and DC power systems make them happen.
This market generated $3.92 billion in 2016, according to Frost & Sullivan, and is projected to reach $4.41 billion by 2021. That's a compound annual growth rate of 2.4%. RBC has added 2.2% since in the month since its last earnings report, and it continues to outperform the market.
Verizon (NYSE: VZ): When it comes to wireless network real estate, there are few bigger companies than Verizon. This giant has a market cap of $196 billion and is engaged in all aspects of communications, information and wireless services.
The size of Verizon reduces the downside risk for investors, although after seeing a recent run and with trading volumes below average there could be a small drop in the short term. For investors with a long-term view however, Verizon has both the name and resources to make big gains in an industry that is sure to grow.
America Movil (NYSE: AMX) is the baby of Mexican billionaire Carlos Slim. America Movil's wireless division, Telcel, dominates mobile number porting across Latin America. And in this game, it trounces even AT&T.
The catalysts for this company keep rolling in. By the end of this year, Slim expects to roll out a 4.5G network in parts of Mexico, and 5G by 2020. This is where the real growth in this industry is, and America Movil's got it in droves. America Movil has so far invested around $52 billion in Mexico's telecom sector alone.
Mexican internet use increased 5 percent just between 2015 and 2016, and some 85 percent of users are getting internet access through mobile phone devices.
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