After 25 years of equity experience, exclusively in the communications equipment sector, Jefferies Managing Director and Equity Research Analyst George Notter is no stranger to the ins and outs of broadband investment. In short, Notter describes his work as being an advisor to investors. His research portfolio includes top suppliers like ADTRAN, Apple, Calix, Cisco, Corning, Juniper Networks and more.
Notter spoke with the Fiber Broadband Association at a recent Fiber For Breakfast to discuss the market opportunity for rural broadband operators.
“The view is that everyone has broadband and it's good, but the reality is that’s not true,” Notter said. “Everyone knows someone who lives in a more rural community that doesn’t have access to broadband.”
According to a study published in January 2021, there is a recognizable population shift out of urban cities and into rural communities. The study utilized mail forwarding requests to determine the population shift. Notter explained that there are 2.5 million mail forward request submissions requested every month. Looking at urban zip codes, the move-out requests noted in the study were up by 17% year over year and the move-in requests to urban zones was up only 7%--that’s a large exodus. When looking at where those mail forwarding requests were being changed to, those populations are not going into the suburbs, Notter explained. Instead, they’re going into exurbs (areas outside of the denser suburban areas) and rural areas.
“You see this COVID-induced shift towards home ownership and out of urban centers into areas that are lower cost,” Notter said.
In December 2020, the FCC published its census broadband connection data identifying 105 million homes in the US that are served with broadband internet.
“However, the FCC’s definition of broadband is very generous,” Notter cautioned.
He said he believes there are at least 23 million American homes that are flat unserved--not receiving any connection. “My estimates indicate that number goes up to at least 30 to 35 million homes with adding in those that are underserved.”
From an investor’s perspective, Notter said there is always concern with a lax in demand. One day, or for a long stretch of days, a product or service is hot on the investor market only for demand to fall and for that market to falter.
“That’s a view I don’t subscribe to for broadband,” Notter explained. “Demand for broadband will be lasting. COVID really shined a light on how necessary broadband is for rural development and the demand for broadband will likely continue to accelerate.”
On the other side of a high demand is concerns about supply.
“In an ordinary environment I’d say I’m not too concerned about [supply constraints], but this is not an ordinary environment at all and there are supply issues everywhere,” Notter admitted. “I’ve got this sort of hope that a lot of the vendors have gone a bit overboard in terms of being cautious on their supplies and when time plays out, hopefully the shortages won't be as bad as they were perceived.”
Notter explained that looking back two or three years ago, he felt there was something of a capital spending truce going on between the industry’s larger public companies.
“However, now the competitive environment is really heating up and folks are realizing that this is an attractive market and there is a real ROI--even in investing in the rural markets,” he said.
The ongoing and future planned funding for rural broadband development helps aid in that competitive market. For example, the RDOF auction last year and the planned phase 2 auction that will invest another $11 billion in funding over another 10-year period in the coming years. Notter also mentioned the American Rescue Plan of 2021 that was recently passed and signed into law that identified $350 billion that could funnel into various rural broadband costs.
“There’s lots more opportunity for funding that we’re excited about. We know the democrats have these intentions that are very significant in terms of big dollar values for broadband.” Notter explained, noting the recently introduced Accessible, Affordable Internet For All Act.
“There’s significant new funding coming into the space that can really drive broadband forward,” Notter concluded. “I’m a big fan of this rural broadband theme and I like what’s going on. There’s a big need in the space. There’s a lot of government dollars coming in and it’s a big picture that we like.”