I want to preface this by saying I am not trying to sandbag, I am trying to open discussion so maybe someone can see through my faults
SWCH is a data center, colocation business that has more growth potential than its peers. This is because it is a data center company which is not structured as a REIT. REITS have to pay 90% of their earnings as dividends to remain classified as a REIT and reap those tax benefits. The large data center companies like EQIX and DLR are REITS because of the large amounts of properties they own. SWCH chose to be structured a different way, as a UPC, so they can reinvest their earnings back into their company.
Switch has their main data center facility in Las Vegas, Nevada, and this facility has an interesting story. In 2002, the CEO Rob Roy attended an Enron auction for this facility. The facility was built with millions of dollars, and Roy bought it for $930K. This was a clear and very strategic move by Roy, and these strategic moves have continued through the life of his company. I like this because it shows the CEO is very strategic, and his decisions have been smart and executed so far.
Comparison's of their locations to two large other colocations businesses, Equinix (EQIX) and Digital Trust Realty (DLR):
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SWCH has a fully operational campus called Core in Las Vegas. This is their primary revenue campus with a utilization rate of 94%, gross square footage of 2M, and power capacity at 275MW with construction of another facility bringing it up to 315MW. Their other campuses are a bit unnerving. They have a campus in Tahoe Reno with one operational building with a total of eight buildings planned. Their operational building in Tahoe is 1.4M square feet with up to 130MW of power capacity. These campuses in Nevada are connected through their proprietary superloop which connects lucrative California markets to these data centers. Smart, because they are paying the lower costs with lower chance of natural distasters for more data center space and are still connected to the large markets. Switch also has a facility in Grand Rapids, Michigan. They have an office building that is 660K sq ft, and one operational building with up to 20MW capacity at 680K sq ft. The other three buildings in MI with the rest 120MW power and 1M sq ft are planned. I am a bit skeptical that the majority of their locations are "planned". They also have a planned campus in Atlanta. They have SUPERNAP facilities in Thailand and Italy as well.
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EQIX has data centers located in Seattle, Silicon Valley, LA, Denver, Chicago, Dallas, Houston, Miami, Atlanta, D.C., Philadelphia, New York, and Boston, among other locations.
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DLR has the same locations, and Oakland, Phoenix, Portland, Sacramento, San Francisco, Austin, Charlotte, NJ, and Northern Virginia.
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The international business is important, but I want to focus on the North American portion of the business.
As you can see, SWCH doesn't have many locations but they are located stratetigcally with high quality centers. This is where quality over quantity comes in. I think eventually the cost of data will exceed expense budgets, and moving to a further out data center like the Las Vegas one would be a better budgetary option.
Now to Financials, which is limited because they only have one quarterly report:
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To measure the health of this business, it's common practice to use a non gaap accounting method called Adjusted EBITDA. Adjusted EBITDA for EQIX, DLR, and SWCH is $2.05B, $1.4B, and $195M respectively. Switch has a high estimate of $195M in adjusted EBITDA for the full year of 2017. When we compared this to debt of 819M, we actually get a very attractive multiple of 4.16 for SWCH. EQIX Debt/Adj. EBITDA multiple is 2.67, while DLR's is 6.23. If we use EQIX Debt to Americas Adjusted EBITDA multiple it get's even better, a multiple of 6.69. From this measure, SWCH is attractive, but it's relative to the amounts of debt these companies have. Adj. EBITDA Margin is a good measure to look at too. EQIX is at 47% margin, DLR 58%, and SWCH 50%.
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Cost of debt. Interest expense / Debt. This will be a measure to see if debt is resonably managed so it doesn't throw off the above multiple. EQIX has a cost of debt of 6.73%, DLR 2.97%, and SWCH 3.30%. SWCH is still attractive.
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Revenue. SWCH's nine month revenue for their colocation business is 226M which is 17% y/y growth. Their connectivity segment is 49M, 24% y/y growth. Full year 2017 revenue is expected to be within 372M-380M. EXIQ Revenue grew 21% to 4.4B in 2017, and DLR revenue grew 15% to 2.5B. SWCH has a small piece of the worldly pie, but a fairly larger piece of North America.
I have found some worries which I'll outline:
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Lawsuit from Cobalt Data centers. I investigated this and it looks like the CEO of Cobalt left SWCH, opened up business and failed, so they sued SWCH blaming them for monopolization of the Las Vegas region. Also, Cobalt doesn't even have a website, their domain is for sale.
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A lot of SWCH's facilities are planned, not even in construction. I looked on google maps at their Tahoe location and I didn't find much buildings there, there are construction vehicles though. It is next to the Gigafactory though, interestingly. I also couldn't find the facility in Thailand on google.
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Glassdoor company reviews tell a story of power hungry people and a negative company culture which fires anyone who brings up problems. Could be worrisome. Could also be the strict nature of mission critical businesses.
Conclusion
What this information has shown me is that the 13 operational buildings SWCH owns out of 24 planned has 10% Adj. EBITDA of EQIX America's Adj. EBITDA. EQIX is the largest data center business in the world, and SWCH is trading at a 4.7B enterprise value while EQIX is 36.8B. Low utilization rates in SWCH's other facilities show there is more revenue growth avialable. The only risk now is if SWCH doesn't execute their other facilities in a timely manner.
TL:DR SWCH is a data center company trading at 4.6B Enterprise value with 10% the Adj. EBITDA as the largest data center business in the world, and 14% of the second largest, DLR. If they finish their facilities they will have large revenue growth, and they are able to retain their earnings unlike EQIX and DLR.
Submitted March 14, 2018 at 06:50PM by Noqt http://ift.tt/2pc6mzJ
