In the current market sell-off, tech stocks have been taking a beating. The Federal Reserve is poised to raise interest rates several times this year, which is taking a toll on the stock market. An old saying in the stock market is "don't fight the Fed," which means investors should be careful when the Federal Reserve is raising rates.
In a rising-rate environment, growth stocks generally suffer since most of their value is based on future expectations, and rising rates undercut the present value of those expectations. Here is one growth stock that has seen a correction, though its long-term story remains intact.
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A REIT that is also a growth stock
American Tower (AMT -0.70%) is a growth stock with a long runway for future growth, and it operates in an industry with high barriers to entry. American Tower is part of a duopoly that controls cellphone towers in the United States. American Tower is structured as a real estate investment trust (REIT), which means it can avoid most corporate taxes provided it distributes most of its income as dividends. REITs are generally not considered growth stocks, but American Tower is a much faster grower than the typical apartment or office REIT.
American Tower builds cellphone towers and leases capacity on those sites to mobile phone providers, cable TV providers, and governments. These leases are generally long-term (typically 10 years or so) with automatic rent escalators of around 3%. Switching costs, the cost of a tenant jumping ship from American Tower to another provider, are sizable, which means that churn rates are quite low -- around 3% as of Sept. 30, 2021.
Demand for mobile data is expected to grow for the next several years
Demand for mobile data has been increasing at a pretty rapid clip and is expected to keep growing. According to one study, the amount of data an average smartphone will use will increase 24% per year through 2027. The rollout of 5G should to be a big driver for mobile data usage going forward. While there have been some headlines recently about 5G and the FAA, the issue doesn't appear to be something that will prevent or delay the rollout.
American Tower has also begun to expand its business by buying data REIT Coresite. This will expand the company's offerings into data interconnection, infrastructure, and storage. The acquisition is expected to add to funds from operations (FFO) per share starting this year.
American Tower has an unusual dividend story
American Tower stock is trading at 26 times the estimated per-share adjusted FFO, which is a reasonable price considering it operates in an industry with large barriers to entry that is growing at a pace well above GDP growth. Companies in this position invariably have high multiples. The REITs stock price is down just about 20% from its high as tech stocks have sold off.
American Tower also has an interesting dividend history. The company has raised its dividend every quarter since 2012. At current levels, it has a respectable dividend yield of 2.3%, which is on the low side for a REIT, but on the high side for a growth stock. Growth and income investors should find something to like in American Tower.
