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Investment Strategy

Investing in the foundation of the digital world

Mar 18, 2024

Present-day necessities like phones and futuristic innovations like Artificial Intelligence (AI) can’t work without physical infrastructure. We have a positive view in those assets.

Tiffany J. Lewis, Head of Infrastructure Investments and Diverse Manager Strategies

Mark O'Connor, Alternative Investment Specialist

Nikhil Dawda, Alternative Investment Specialist

 

The words “digital infrastructure” might seem contradictory: Digital brings to mind the web, AI and the intangible, while infrastructure calls up massive bridges, roads, and power plants. But the ongoing AI revolution and the worlds of data and ecommerce are impossible without physical infrastructure like cell towers and data centers.

And we think that today is the beginning of a building boom.

Demand for data transmission and storage are growing dramatically. Global data traffic is projected to grow 25% per year through the end of the decade, more than tripling its 2023 levels.

Global Data Traffic by Region

Sources: Omdia Network Traffic Forecast (2020), Ericsson Mobility Report (2022). Outlooks and past performance are no guarantee of future results.
Bar graph depicting global data of data traffic by region projection from 2021 to 2028. CAGR for regions include North America 21%, APAC 26%, EMEA 25%, LATAM 26% with total of 25%.

The digital infrastructure that exists today can’t support that demand growth.

The world’s leading tech companies and governments recognize this fact, and they’re making enormous investments to expand that infrastructure. Without it, global economies can’t achieve their potential, and ongoing breakthroughs in healthcare, AI and entertainment can’t deliver on their promise. Even the Magnificent Seven1 can’t bring their plans to bear without adequate digital infrastructure. The need to expand and improve this infrastructure is intense.

In our view, one prudent approach is investing alongside global government priorities within digital infrastructure. In the U.S., as part of the 2021 Infrastructure Investment and Jobs Act, the federal government is spending $65 billion to expand access to broadband. In the European Union, countries are working to deliver gigabit broadband to all households and 5G networks to all populated areas by 2030.

Demand for data, like for water or electricity, is consistent. Its use holds steady even in economic slowdowns or recessions. While all investing involves risk, we think that consistency offers a measure of confidence in investment returns. One approach we believe has potential is in digital infrastructure directly, either building it from the ground up or improving options that already exist. Then, these assets can sign long-term contracts with governments and/or major companies that will use them for years.

Four major types of digital infrastructure meet our criteria

We believe there are potential benefits in exploring private market investments within digital infrastructure. Private market investment may offer investors opportunities for strong, stable cash flows along with the potential benefits of inflation hedging and diversification because of their perceived low correlation to public markets. It can also deliver the opportunity for inflation hedging and diversification because of their lower correlation to public markets.

Four types of digital infrastructure check those boxes:

Fiber optic cables

  • Fiber optic cables (“fiber”) link all kinds of data transmission, serving cell towers, data centers, individual end users and businesses.
  • High-speed internet connections open up access to a wide range of services like telehealth appointments, job applications and video interviews.
  • Global bandwidth demand is growing exponentially, which means deploying fiber is critical.
  • There’s an acute shortage: Nearly 60% of the U.S population lacks access to fiber today. 

Data centers

  • Data centers are “warehouses” for computing and processing large amounts of data, storing that data and housing networking equipment.
  • Data centers are vital for companies with AI ambitions, as companies need access to that data and analytics to make AI tools work.
  • Compared to other types of digital infrastructure, data centers have historically exhibited high returns on invested capital and lower customer turnover.

Cell towers

  • A cell tower is a raised structure containing transmitters and receivers. As global internet bandwidth grows, more towers and smaller cell sites are needed to create functioning networks.
  • The U.S. cell tower market has consolidated over the past 20 years, limiting the number of competing companies and supporting attractive valuations.
  • International markets are in different phases of the same consolidation cycle, and many emerging markets’ networks are shifting their technology, which requires significant investment.
  • While past performance is no guarantee of future results, as investments, cell towers have historically offered stable recurring cash flows and high barriers to entry due to the tremendous capital required up front.

Wireless communication

  • Invisible radio frequencies enable all wireless technology, including cell phones, Wi-Fi, Bluetooth devices, aircraft navigation and satellite applications.
  • Collectively, these frequencies are called “spectrum”.
  • Demand for high-quality spectrum assets such as licenses and bundles of frequencies continues to grow because of the proliferation of connected devices and faster networks.

What digital infrastructure may do for investors

The case for digital infrastructure is similar to the investment case for physical infrastructure in this way: We believe these assets are fundamental to modern life and that they offer an opportunity for strong and stable cash flows over the long term.

At a time when inflation is a top consideration for many investors, we see digital infrastructure investments as a helpful method for potentially hedging returns. The prices data centers and cell towers charge their customers (primarily tech and communications firms and governments) adjust for inflation. That means periods of higher inflation wouldn’t erode returns.

Lastly, we believe private digital infrastructure assets are an opportunity to diversify a portfolio in important ways. It’s possible to invest in digital infrastructure through public companies, but the companies in the private market may not be as susceptible to a sell off during a broad stock market decline, which means they may deliver returns uncorrelated with the stock market or to the other asset classes. There may be an opportunity for additional portfolio stability. 

We can help

Could digital infrastructure investments be appropriate for your financial goals? Your J.P. Morgan team can help you learn more.

 

1Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. These stocks are sometimes treated as a group because of their size, market-leading position, and sustained investor interest.

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