As data center REIT executives burn the midnight oil preparing for earnings season, here’s our recap of data center stock performance in the year’s first half.
Let’s start with a few charts:
Tale of the Tape: Price Performance Poor to Horrid
It’s no secret that it wasn’t exactly smooth sailing for data center REITs in the first half. Investors in the sector are not used to seeing a chart like this:
Must be Present to Win
But July, so far, has seen data center stock price start to bounce back. As a result, investors who had the confidence to buy data center shares closer to 52-week lows than highs are starting to reap rewards, as the third quarter kicks off:
"Price is What You Pay, Value is What You Get"
That’s one of Warren Buffet’s most famous quotes. Another adage often attributed to him is, "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." In that one, the legendary investor was actually quoting his mentor, Benjamin Graham, who literally wrote the textbook on being a successful value investor.
Mr. Market is often fickle in the short term. Herd mentality is rampant on Wall Street, where the pendulum constantly swings between irrational exuberance and excessive pessimism.
Sectors can fall in and out of favor from quarter to quarter, but thinking long term, savvy investors who understand industry and company fundamentals buy great companies when they "go on sale."
Here are two recent examples where certain catalyst events created inflection points, or opportunities to buy where upside was much greater than the risk associated with the downside.
Global connectivity leader Equinix was in a special situation in the first half of 2018 because of an Analyst Day on June 20th. Here’s another chart:
Equinix shares were trading at $385, near a 52-week low, in mid-May. I explained in an earlier DCK Investor edge column why the company’s biannual Analyst Day would be a positive catalyst for its beaten-down shares:
There is a lot riding on the upcoming Analyst Day. A five-year growth plan is expected to be revealed. Equinix has an unequaled global moat, well-positioned to take advantage of the digital transformation and distributed IT architecture trends. Now, the company is layering the HIT initiative on top of the retail colocation business model.
Investors should always be wary of falling knives. However, my sense is that initiating or adding Equinix shares at current levels will be rewarded by a bounce back following the Analyst Day catalyst.
The prediction turned out to be true. The event appears to have had a positive impact on Equinix shares. Here’s more coverage of the Equinix Analyst day:
CyrusOne shares traded slightly downward following its first-quarter results announcement and earnings call.
The company recently kicked off a global expansion strategy with a $100 million investment in and partnership with China-based data center provider GDS Holdings and acquisition (pending) of Zenium for a European platform.
But its shares started a steady climb after executives presented at three different conferences, where they explained the strategy in more detail. I explained the dynamics at work in another earlier column:
CyrusOne is in the process of becoming the third US-based global data center REIT. Meanwhile, there aren't any issues with key metrics. The ROIC on new development is averaging 15 percent, and EBITDA margins are at 56.5 percent (down 150 basis points due to ramping up for Europe). The sales are there. The growth is there. The capital is being invested with a longer-term horizon.
CyrusOne has done good job communicating with investors and analysts. It appears an investment-grade rating could be coming within the next year. The transparency and additional color have been rewarded by a significant increase in share price. This is a valuable lesson some industry peers have yet to fully grasp.
Arguably, the entire data center sector’s rise in July appears to have created a tailwind for shares of both Equinix and CyrusOne.
It could also be said that investors and analysts were so impressed with what they heard from Equinix and CyrusOne, that Digital Realty, CoreSite, and QTS Realty all caught a tailwind on the stock market.
Separating signal from noise on Wall Street is one of investors’ greatest challenges. Analyst upgrades and downgrades, secondary share offerings, and M&A deal announcements all cause fluctuation in share performance on a daily or weekly basis.
But, investors who bought data center stock in May have seen double-digit price appreciation as of this writing. So, even though data center REITs are down to flattish since January, there is always a bull market somewhere, but it takes due diligence to recognize the opportunity and the hutzpah to buy quality companies when the herd is selling them.
- CoreSite Realty reports second quarter 2018 earnings on July 26
- Digital Realty reports second quarter 2018 earnings on July 26
- QTS Realty reports second quarter 2018 earnings on July 26
- CyrusOne reports second quarter 2018 earnings on August 2
- Equinix reports second quarter 2018 earnings on August 8
- Switch has yet to post its second quarter 2018 earnings announcement date