The demand for third-party colocation centers from companies looking for secured places to store some of their information technology (IT) assets has been on the rise, and it will only continue to grow. We’re talking about physical IT assets, such as servers, storage, networking equipment, and other technologies found in IT infrastructure. To play the strong tailwinds here, you might want to take a look at Switch Inc (NYSE:SWCH).
Switch Inc operates advanced primary colocation data locations in Nevada, Michigan, and Georgia. It’s also expanding to Italy and Thailand.
The centers, which serve some of the biggest companies in the world, are all operated on 100% renewable energy.
Switch stock fell to $10.93 during the March sell-off before rallying nearly 50% to current levels. But SWCH remains well below its 52-week high of $19.99 and is down 4.5% over the past year.
SWCH stock failed to hold channel support and its 50-day and 200-day moving averages. Watch for a possible move below $15.00, which would be an aggressive opportunity.
Chart courtesy of StockCharts.com
Capacity Expansion Will Power SWCH Stock
Switch Inc revenues are dependent on both demand and the addition of capacity via more colocation centers.
The growth so far has been strong, with Switch Inc growing its revenues in each of the last four years to a record $462.3 million in 2019. The compound annual growth rate (CAGR) was around 15% during this time.
|Fiscal Year||Revenue (Millions)||Growth|
(Source: “Switch Inc,” MarketWatch, last accessed September 4, 2020.)
Looking ahead to 2020, Switch Inc is estimated to grow revenues by 11.7% to $516.5 million followed by 11.2% to $574.2 million in 2021. (Source: “Switch Inc (SWCH),” Yahoo! Finance, last accessed September 4, 2020.)
The key for SWCH stock is capacity expansion, which requires heavy capital expenditure.
A positive is that Switch Inc has managed to deliver positive earnings before interest, taxes, depreciation, and amortization (EBITDA) and profits.
EBITDA increased in three of the last four years to a record high in 2019.
|Fiscal Year||EBITDA (Millions)||Growth|
(Source: MarketWatch, op. cit.)
Switch Inc is also producing generally accepted accounting principles (GAAP) profits; this trend is expected to continue.
|Fiscal Year||GAAP Diluted EPS||Growth|
(Source: MarketWatch, op. cit.)
SWCH is slated to report profits of $0.14 per diluted share in 2020 and $0.26 per diluted share in 2021. There is a high estimate of $0.32 per diluted share in 2021. (Source: Yahoo! Finance, op. cit.)
An area of concern is the net debt of around $925.0 million on the balance sheet. (Source: Yahoo! Finance, op. cit.)
This is not surprising given the company’s heavy spending to build capacity. But based on its revenue and profitability, I don’t see an issue at this time.
Switch Inc has attracted decent institutional ownership. About 215 institutions hold 61.63% of Switch stock. (Source: Yahoo! Finance, op. cit.)
The bull case for SWCH stock will be the strong tailwinds from the demand for third-party hosting centers for critical IT assets.
Switch stock is not cheap, trading around 59 times the consensus 2021 EPS and 17 times book value. But given the upside prospects, my view is that Switch Inc could deliver strong long-term capital appreciation.