Returns to Digital Infrastructure businesses have been incredible over the past two decades. Investing in Digital Infrastructure is a means of owning durable, quality businesses that capture the trend of mass data consumption - the digitization of everything.
We demand frictionless access to all of our data - anywhere, anytime. Enabling this access has been one of the most important investment themes of the past 50 years and we believe it will be for the next 50 years. Powering that vision is a latticework of Digital Infrastructure assets that allow you to remain connected to a ubiquitous, high-quality internet experience.
In this guide, we’ll show you everything you need to know about Digital Infrastructure investing. With unique experience in the industry, we explain the basics of Digital Infrastructure. We also provide our perspective on why, in our opinion, it’s generated such favorable investment returns, how to invest in Digital Infrastructure, and current themes. We also share our unique framework for investing in the Digital Infrastructure asset class going forward. Finally, our guide will cover 8 companies that specialize in this area and which, we believe, have the potential for significant growth in the coming years.
Table of Content
This post answers the questions: what is “Digital Infrastructure” and how can we invest in it? It also touches on 8 Digital Infrastructure businesses and their favorable stock returns. As we show below, Digital Infrastructure companies like SBA Communications (Ticker: SBAC), Equinix (Ticker: EQIX), and Charter Communication (Ticker: CHTR) have quietly been some of the top returning large cap companies in the world. Each of those operates in a different vertical, yet each has historically generated favorable returns for its owners.
As its name states, a clear goal of investing in Digital Infrastructure is to capture the growth of “digital” and benefit from the soundness of “infrastructure.” We designed the BYTE Index to help track the opportunity we believe these robust, growing infrastructure businesses represent.
Anytime you open an app on your smartphone, use Google, watch a TikTok, save a document to the cloud, have a Zoom call, access the blockchain, Netflix ‘n Chill, or play an online game, your experience relies on Digital Infrastructure. Assets such as data centers, fiber connectivity, last mile broadband, and mobile towers make up the backbone of the internet, delivering the data we use for this entire range of applications. As our data consumption grows, so too does the importance of high-performing Digital Infrastructure to connect, transport, and store that data. Digital Infrastructure businesses benefit as the Internet of Everything expands.
Digital Infrastructure refers to the long-lived physical assets that transport and house the data we want to take for granted. Mobile towers, data centers, and fiber optic cable are classic examples. We built the BYTE Index to focus on assets that appear to have monopolistic or oligopolistic positions and characteristics that include:
As end-user performance expectations grow, the importance of these assets grows with it, reinforcing those positive characteristics. Data traffic and data consumption have grown rapidly for decades. This inexorable trend will likely define the 21st century, driving digital infrastructure demand for the foreseeable future.
Massive, world-changing industries are built on top of Digital Infrastructure1:
These existing use cases are expected to grow for decades to come while new, innovative uses will emerge and add to the underlying demand trend. Companies in each of these industries require access to high-performing Digital Infrastructure to beat competitors and effectively serve customers.
Source: Cisco Visual Networking Index™ (VNI) Complete Forecast 2017
When you are at home, streaming your favorite Netflix (Ticker: NFLX) show on your iPhone, an incredible array of activities take place in the background to provide a perfect, real-time viewing experience. These activities rely on Digital Infrastructure.
Netflix needs to know what movie you want to watch in order to deliver it to you. To do this, your phone connects to either an antenna on a mobile tower or to a wifi router. When the Netflix app opens, it is delivering a custom recommendation menu to you based on Netflix’s understanding of your interests: these calculations happen on compute engines in data centers far away from you. It delivers that custom menu to you from the data center, transported across fiber at the speed of light, where it either is routed to your home wifi or to the mobile antenna you are connected to.
If it is via mobile, your provider (e.g., Verizon, AT&T, or T-Mobile) has deployed antennas all over the country in order to provide ubiquitous coverage. Most commonly, those antennas are hung on a cell phone tower (perhaps owned by American Tower (Ticker: AMT) or Crown Castle (Ticker: CCI)). AT&T leases space on that tower from AMT or Crown.
Your movie selection takes the form of data packets that need to travel back to the tower and connect to “the internet.” This journey likely means it travels on fiber optic cable from the tower to a data center. Each of these - towers, fiber, and data centers - are key elements of Digital Infrastructure. They are the long-lived physical assets that transport and house data.
Similarly, if your phone was instead connected to your home’s wifi, your wifi router connects to your cable or fiber service (e.g., Charter Communications (Ticker: CHTR)), which then transports the data from your home to a data center. Once there, Netflix needs to deliver you the movie itself. Netflix partners with Amazon’s AWS cloud (Ticker: AMZN), and the movie is delivered as a streaming series of data packets that reverse the journey back to your phone.
This all has to happen with near instantaneous speed, which means you, Netflix, AWS, and Verizon all pay for access to the kind Digital Infrastructure assets the BYTE Index tracks.
In our example, each of Netflix, Verizon, and Amazon lease space in data centers all over the world. A data center is a building inside which companies place specialized computers, such as “servers,” that are meant to store and transport data. Data center owners like Digital Realty (Ticker: DLR) and Equinix (Ticker: EQIX) are amongst the largest REITs in the world - and their focus is on acquiring and developing data centers that they lease out to all sorts of global businesses.
Key tenants of data centers include large telecom companies (such as Verizon and AT&T), large cloud companies (such as Google and Amazon), and large SaaS companies (such as Microsoft or Salesforce) as well as thousands and thousands of enterprise and SMB customers. Anyone that needs to store, access, and/or compute data offsite ultimately needs space in a data center to do so. As a given data center gathers more tenants and more connectivity, it becomes an increasingly important hub in a massively intermeshed hub-and-spoke network, forming the physical internet.
Due to the high demand and critical nature of towers, fiber, and data centers, the owners of these assets often lease them on long-term contracts that generally have annual price increases, providing highly predictable, recurring revenue streams.
The long-lived nature resembles traditional infrastructure assets (such as toll roads) where you “build them once, monetize them for decades.” The primary capital cost happens up-front, while ongoing maintenance requirements are more modest.
A tower, data center, or fiber optic cable can last for many decades, providing owners a real asset economic profile.
Digital Infrastructure undergirds the global trend of “more, better, faster, everywhere” data consumption. The drivers of this consumption are pervasive: cloud, gaming, social, AI and machine learning, SaaS, genomics, and work from home, to name a few. And our expectations grow with each passing day.
To meet those expectations, tech companies, enterprise, SMB, and consumer all spend to use Digital Infrastructure. That spending drives the underlying investment into Digital Infrastructure assets, like those in the BYTE Index.
The BYTE Index looks at three primary Digital Infrastructure verticals:
The unifying characteristic of these asset classes is their “build it once, monetize it for decades” nature. That generally enables inflation resilience, high cash margins, recurring revenue, and growth as demand for digital consumption grows.
In addition to those core verticals, the BYTE Index universe also includes companies that are directly exposed to those trends, such as certain wireless broadband strategies, such as Gogo (Ticker: GOGO) and publicly traded private equity firms that focus primarily on Digital Infrastructure (e.g., DigitalBridge, Ticker: DBRG).
Many people want to pick a winner: the winning streamer; the winning gaming platform; the winning cryptocurrency. Will TikTok beat Meta? Can Microsoft hold off Salesforce? These are incredibly difficult questions and remain in constant flux.
Investing in Digital Infrastructure is a way of saying, “we don’t need to know who will win. All we need to know is that more data will be consumed in the future. And data requires storage and transportation.”
In that sense, Digital Infrastructure is like the ports, tollroads, and rails of data. As long as people want more, better, faster, everywhere, the demand for Digital Infrastructure will grow. And rather than picking whether consumers will want more data from Netflix vs. Disney, Digital Infrastructure can be agnostic, growing with the trend.
The growth in mobile connected devices highlights the point (see image below). The US, which has 330 million people, has nearly 400 million mobile devices and another 300 million mobile IoT devices (Internet of Things, such as modern cars and Alexa devices). It is easy to imagine a future where most devices are IoT, powering a constantly increasing need for connectivity, bandwidth, storage, and compute.
While the term “the cloud” can feel overused, its prevalence implies its importance.
The cloud represents the idea that more and more of the computing that formerly happened on your desk now happens in a data center. Your iPhone and laptop are becoming smart nodes that are hooked back to the world’s most powerful supercomputer: the cloud.
For mass adoption to continue, this cloud-based experience has to be seamless - it can’t feel like the compute activity is happening miles away from you in a data center. Creating that perfect experience demands investment in Digital Infrastructure.
Lest one think, “sure, we need more Digital Infrastructure, but the returns to Digital Infrastructure can’t possibly be as attractive as large tech or broad equity indices,” below are long-term returns for eight of the most prominent (and longest continuously listed) US-based Digital Infrastructure businesses.
Mobile Tower Owners:
|10-Year Annualized||20-Year Annualized|
|American Tower (AMT)||15.9%||25.2%|
|Crown Castle (CCI)||14.4%||22.4%|
|SBA Communications (SBAC)||19.1%||31.3%|
Data Center Owners:
|10-Year Annualized||20-Year Annualized|
|Digital Realty (DLR)||15.9%||19.2% (from 10/24/2004 IPO)|
|Equinix (EQIX)||16.7%||29.0% (from 12/31/2002)|
Broadbased US Equities:
|10-Year Annualized||20-Year Annualized|
All of the above returns for the period ending June 30, 2022. Source: Bloomberg TRA.
Those are impressive returns.
Given the long duration, the returns are predominantly driven by the fundamental business opportunity those companies are attacking: leasing-up existing towers, building new data centers, raising prices by upgrading customer speeds, etc.
While we obviously cannot expect future Digital Infrastructure returns to be as high as in the past, history highlights the fundamental backdrop that these companies are operating within. As these companies continue to reinvest their capital into that opportunity set, while returning excess capital to owners via buybacks and dividends, owners can expect to receive the economic return of the asset class, over time.
The past has been wonderful, but how does one position themself for the future?
It is one thing to say, “Digital Infrastructure grows with the trend,” but investing in that vision begs us to distill down the return drivers. What traits point us toward future high returns?
We believe the characteristics of high-returning Digital Infrastructure investments are encapsulated by a handful of traits, which generally can be described as Growth, Soundness, and Value.
The digital trend of “more, better, faster, everywhere” is implicitly a trend of growth. Each of those characteristics requires additional capacity to transport and store data. This is a core tenet of thoughtful Digital Infrastructure investing: identify businesses that are exposed to the long-term growth in data consumption. Recent growth is the clearest indicator of future growth. By implication, we want to avoid outdated, legacy telecom assets like copper phone lines and DSL. We want modern assets that are in high demand and not easily displaced. Growth is a key tenet of Digital Infrastructure investing.
High-quality infrastructure assets are akin to well-located real estate - stable and important properties that can handle appropriate debt loads that further increase equity returns. However, a good idea can be taken too far. A thoughtful Digital Infrastructure investment process can limit exposure to companies with too much debt, that are too small or unproven, or that lack durable, recurring revenue. This last point is critical to our definition of “infrastructure”: many technologies, like semiconductors or routing equipment, are involved in the transportation of data, but these assets often have comparatively short useful lives. Ideal Digital Infrastructure assets are characterized by, “build it once, monetize it for decades.” Cell phone towers, data centers, and fiber optic cable are examples of durable assets that can be used for decades with minimal ongoing maintenance costs, whereas servers and routers are subject to constant obsolescence and the concomitant upgrade cycle.
Likewise, many infrastructure assets benefit from long-term contracts with credit worthy counterparties in the form of large enterprises and hyperscale tech companies, leading to predictable, recurring cash flow. Soundness is a key tenet of Digital Infrastructure investing.
As shown above, Digital Infrastructure assets, like US mobile tower businesses, have generated favorable returns. However, markets have taught us time and again that it is possible to pay too high a price for even the very best assets. As a result, part of assembling an attractive portfolio is to weigh the prospective returns against each other, hunting for the best available opportunities. Techniques that attempt to assess how much cash an owner might receive in the future help rank the opportunity set. All else being equal, we’d rather pay less to get more. Value is a key tenet of all investing.
While, arguably, “value” encapsulates all characteristics of attractive investments, a clear goal of Digital Infrastructure investing is to capture the growth of “digital” and secure the soundness of “infrastructure.” We believe that placing extra weight on those traits can help ensure exposure to the core drivers of the asset class.
Digital Infrastructure has matured into a standalone investment asset class over the past decade. With its broadening importance has come an accelerated pace of acquisitions, both by strategic consolidators and private equity financial buyers.
In just the past year, a significant number of large deals have been announced or closed, including the four largest data center acquisitions in history.
In each of these cases, the buyer is highly sophisticated and acquired a scale asset at an optically full multiple. These are smart buyers who clearly believe those optically full prices still represent good value. The plan for each of these data center buyers will be to aggressively deploy capital to grow via development and acquisition.
Likewise, for mobile infrastructure (e.g., towers) and cable and fiber, there is a robust and regular M&A market. Tower companies generally trade at multiples similar to the data center multiples above. Fiber assets are often acquired in the mid-teens and cable in the high-single-digit to low-teens - both strategic and financial buyers are commonplace.
While we’ve only highlighted US-focused companies, this phenomenon is happening globally.
In 2022, we’ve already seen Australia’s Uniti Group (Ticker: ASX:UWL), a wholesale fiber provider, acquired for US$2.2 Billion (23x NTM EBITDA) while Chinese data center operator, Vnet (Ticker: VNET), is rumored to have multiple bidders circling.
In July, Brookfield (Ticker: BAM) and DigitalBridge partnered to acquire 51% of Deutsche Telekom’s European tower portfolio at a EUR 17.5 billion valuation and a mid-20s EV/EBITDA multiple.
Beyond these large transactions, smaller, non-publicly traded consolidation happens regularly, as financial players like DigitalBridge, KKR, Blackstone, and Stonepeak comb the world for new opportunities.
In addition to the tower, fiber, and data center players mentioned above, cable assets continue to garner M&A interest.
US cable operator WideOpenWest (Ticker: WOW) recently sold off five of its markets via two separate transactions to two different buyers for a combined $1.8 billion at ~11x EBITDA (the acquirors were Atlantic Broadband, owned by Canadian parent Cogeco (Ticker: TSX:CGO) and private equity-controlled Astound Broadband. The remainder of WOW’s business is rumored to be for sale in 2022.
Likewise, large cable MSO, Altice USA (Ticker: ATUS), has acknowledged acquirer interest in its Suddenlink geographies, with rumored pricing as high as 15x EBITDA.
While this is just a partial list of recent deals, it helps frame the “always on” nature of M&A in Digital Infrastructure with sophisticated buyers constantly on the hunt.
BYTE is a global index, comprising 40 global Digital Infrastructure companies, seeking to optimize a balance of growth, soundness, and value.
The BYTE Index looks at three primary Digital Infrastructure verticals:
The unifying characteristic of these asset classes is their “build it once, monetize it for decades” nature. That enables inflation resilience, high cash margins, recurring revenue, and growth as demand for digital consumption grows. It also includes certain other businesses that are primarily focused on Digital Infrastructure.
Digital growth is a truly global trend. While the majority of BYTE’s exposure is in the US, it also can include substantial exposure to hard-to-reach markets around the world.
As described above, BYTE filters its universe by ranking companies on a proprietary algorithm that sorts by Growth, Soundness, and Value, then optimizes its portfolio from that ranking. The Index rebalances semi-annually, attempting to reflect the best current opportunity set.
When done well, Digital Infrastructure investing offers exposure to the megatrend of digital growth with the soundness and stability of important infrastructure-like real assets.
In the 20th Century, one of the most well-trod paths to wealth creation was to acquire and hold Class-A real estate - important buildings in great locations that would be difficult to replicate. High-quality Digital Infrastructure is, in our opinion, the Class-A of the 21st Century.
These are mission-critical and difficult-to-displace infrastructure for the transportation and storage of data. In some sense, the best Digital Infrastructure assets resemble unregulated utilities with monopolistic or oligopolistic local competitive positions. The past two decades have seen Digital Infrastructure emerge as a standalone asset class with a history, in our opinion, of encouraging returns.
As our world becomes increasingly digital, we are demanding access to more, better, faster, everywhere. Our reliance on Digital Infrastructure increases with this demand. This desire for data ubiquity has been the most important technological trend of the past 50-years and will be relevant for the next 50-years.
This backdrop of growing importance and demand makes Digital Infrastructure an attractive asset class for sophisticated investors. Providing easy, straightforward access to this trend is why we created the BYTE Index - its focus on balancing growth, soundness, and value to construct a global 40 stock index is meant to capture the attractive returns of these favorable assets, enabling well diversified portfolios to incorporate the Digital Infrastructure investment opportunity.
1Market size and revenue data from Grandview Research and PwC