July 19, 2017
By Alan Livsey
Investors put a low valuation on the pipes that connect us to the internet
Twenty years ago, when the internet was in its adolescence, some smart market pundit came up with the TMT acronym to label this “new economy” investment theme. Technology, media and telecommunications captured the gamut of users interconnected at the speed of light.
One reason the first tech bubble deflated at the beginning of the last decade — Datastream’s TMT index fell by 80 per cent — was that telecom operators could not provide the speeds necessary to support the promise of streaming and other dotcom dreams. Excess capacity appeared and profits eventually fell well short of expectations. Later in the decade these operators were prized for their utility-like cash flows.
Since the global financial crisis, technology companies have exploded in value. Disaggregate the old TMT indices and one can clearly see the divergence in performance. Technology has roughly provided a 300 per cent return since early 2009, with media a bit 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 streaming speed”. Where would Facebook be if data download speeds had remained at 2011 levels? US median download speeds quadrupled to 40 megabytes per second by September 2015, according to the Federal Communications Commission.
Even the older tech names, such as Apple and Microsoft, have soared by more than a quarter in the past year. Meanwhile telecoms such as Verizon, BT Group and Telstra, bring up the rear, their shares all down by double digits.
While there are exceptions — Comcast and Altice NV — come to mind, investors do not put high values on the infrastructure over which all the data travels. Telecom operators, which often control the backbone of their local broadband networks, mostly trade at enterprise values of about six times their earnings before interest, tax, depreciation and amortisation. Data, for them at least, does not pay. Tech trades on 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.