A global pandemic has halted industries across the world, leaving investors searching for the rare recession-resistant investment. We believe some of the most resilient businesses are the select companies providing the foundation keeping us connected and productive during the stay-at-home order.
Broadband infrastructure has been essential to keeping people connected. Friends and colleagues alike have stayed engaged on video chat apps, teachers have delivered lessons online, doctors have performed check-ups without leaving the home, and families have stayed entertained in their living rooms.
We believe the companies providing the backbone of our technological ecosystem – wireless towers, high speed data networks, and data centers – are some of the most durable growth businesses in markets today, both for the secular trends they support and the competitive moats around their business.
First, consider the growth potential that still lies ahead: Mobile wireless traffic growth continues unabated, with estimates projecting nearly 50% annualized growth in the coming years.1 We believe only an estimated 25% to 30% of developed market IT budgets are outsourced to the cloud, suggesting a long runway for cloud services to possibly drive future economic growth.
But only a limited number of companies will monetize this data flow. Consider how broadband infrastructure companies are insulated from competition:
- Wireless Towers: Within the wireless tower industry, zoning and permitting issues make building new towers nearly impossible. Wireless architecture raises the barrier to entry more. This means the existing tower infrastructure is likely the future tower infrastructure. Long-term contracts with escalators should remain the norm.
- Data Centers: Data centers are essentially landlords to cloud computing. A finite number of these facilities are network-dense, and provide businesses large and small with an on-ramp to the cloud, where applications can be run and modern business transactions can be executed. These facilities enjoy powerful “network” effects and high switching costs. As the facility accumulates hundreds of cloud, telecom, and enterprise customers, it becomes economically unthinkable for businesses to reject the low-cost, mission critical nature of the co-location model. Customers sometimes refer to this dynamic as a tax on the internet. Investors think of it as a great setup for high returns on capital.
- Broadband Cable Networks: Cable networks were purpose-built for video applications and have since been reallocated for broadband use. In most of the country, building competing infrastructure was never going to be economic. Thus, regional cable providers became the primary conduit to the internet in most American homes.
At Reaves, we have a 42-year history in “essential service” investing. Our investment focus lies solely in the industries that form the foundation of a modern economy. The necessity of these businesses has historically led Reaves ERISA Composite2 to outperform the S&P 500 Index3 over the long term, largely by holding up in economic downturns when the market appreciates resilient business models most. As the global economy faces its most severe threat since the great financial crisis, we believe these companies deserve a closer look.
