While technology companies have soared in value since the financial crisis, telecoms have trailed by a long way. The FT's Alan Livsey explains the market's under-appreciation of the data infrastructure.
Produced by Filip Fortuna. Filmed by Rod Fitzgerald.
20 years ago, when the internet was in its adolescence, some smart market pundit came up with the TMT acronym to label a new economy investment theme. Technology, media, and telecommunications captured the gamut of users interconnected at the speed of light. Part of the reason the first tech bubble deflated at the beginning of the last decade-- the one TMT index fell by 80% then-- was that telecom operators could not readily deliver the promise of instant gratification. Excess capacity appeared and profits eventually fell well short of expectations.
Later in the decade, however, these operators were prized for their utility-like cash flows. But since the global financial crisis, technology companies have exploded in value. Disaggregate the old TMT index and one can clearly see the divergence in performance. Technology has provided a four bagger returns since early 2009 with media further back. Telecoms though have trailed by a long way, not even doubling.
This looks odd. As Neil Campling at Northern Trust Capital Markets points out, "Netflix's subscriber growth depends on broadband's streaming speed. Where would Facebook be if data download speeds had remained at 2011 levels, never mind a decade ago?"
US median download speeds have quadrupled to 40 megabytes per second by September 2015, according to the Federal Communications Commission. So even the older tech names, such as Apple and Microsoft, have soared by over a quarter in the past year. Meanwhile telcos, such as Verizon, BT group, and Telstra, bring up the rear. Their shares all down by double digits.
While there are exceptions-- Comcast and Altius come to mind-- the market does not value highly the infrastructure over which all this wondrous data travels. Most of the telecom operators which often control the backbone of their local broadband networks traded enterprise values around six times their earnings before interest tax depreciation and amortisation. Data for them at least does not pay. Tech trades are at least double that ratio.
While no one expects to see the valuations of telecom operators roaring back soon to their highs of the early millennium, the infrastructure of the internet deserves a higher rating.