Switch Inc Set to Benefit From Huge Data Centers
While cloud storage has become integral for many companies to store data, there is also increasing demand from companies to store their physical IT assets in what is known as colocation data centers.
The thinking is that storing technology assets at a third-party location helps to reduce the need to spend money on expensive in-house facilities and reduces the threat of storing all assets in-house in case something disastrous happens.
A mid-cap player in the data center market with above-average upside is Switch Inc (NYSE:SWCH). Switch stock has been is outperforming, with a 76% gain this year, but underperforming over the last year, down six percent.
With SWCH stock trading 28% below its initial public offering (IPO) price of $17.00 in October 2017, there is an opportunity to accumulate shares.
Switch is presently running three advanced primary colocation data locations with a capacity of up to four million gross square feet. A fourth center is planned.
The company’s client list is broad, including various technology, digital media, cloud and managed services, financial institutions, and telecommunications companies.
The below Switch stock chart displays the downside break in August 2018 to the December low prior to the V-shaped rally:
Chart courtesy of StockCharts.com
Watch for strong support for SWCH stock around $8.00 to $9.00. If the momentum returns to the technology sector and Switch can deliver, there is no reason why its stock cannot trade back at its IPO price.
My Bullish Case for SWCH Stock
Revenues have increased in three consecutive years, as the below table shows:
|Fiscal Year||Revenue (Millions)||Growth|
(Source: “Switch Inc.,” MarketWatch, last accessed June 6, 2019.)
The decline in the revenue growth rate was disappointing, but Switch Inc is estimated to turn things around with growth of nine percent to $442.5 million in 2019 and $493.3 million in 2020. (Source: “Switch, Inc. (SWCH),”Yahoo! Finance, last accessed June 6, 2019.)
How fast revenues grow will depend on adding capacity and clients.
That said, Switch has been producing positive earnings before interest, taxes, depreciation, and amortization (EBITDA), including strong growth in 2018.
|Fiscal Year||EBITDA (Millions)||Growth|
(Source: MarketWatch, op. cit.)
Switch is also profitable, but the company needs to deliver steady growth.
|Fiscal Year||Diluted Earnings Per Share||Growth|
Earnings are expected to double to $0.18 per diluted share in 2019 and rise to $0.21 per diluted share in 2020. (Source: Yahoo! Finance, op. cit.)
The company has yet to generate positive free cash flow (FCF), but it should be moving toward that as profits ramp higher.
Switch Inc has decent support from institutional investors. About 138 institutions hold 61.1% of the outstanding shares. (Source: Ibid.)
Valuation is not important at this time as long as Switch ramps up its revenues and moves towards delivering steady earnings growth and positive FCF.