Datacenter REITs

[Palantir]

As the tech investors on this board know, there has been and will be vast demand for building, maintaining, and running data centers for the data and operations that servers run for all the important and interesting companies we follow. As a result, I think this sector presents interesting opportunities.

 

The core value proposition, in my opinion is that you have a relatively cheap building and plot of land housing millions of dollars worth of really expensive and specialized equipment, however, it is difficult to suddenly pack up and move that equipment to another data center location some random location away. As a result, I believe there are some switching costs to this business.

 

My concern is lack of barriers to entry. It seems to me that anybody should be able to put a building together and invite companies to park their servers there. In that sense it seems like an office REIT. But I hope I am wrong here.

 

This sector has seen tremendous growth, and consequently, valuations are proportionately high, that being said, if the business and growth prospects are high quality, these high valuations may not be a major stopping point.

 

Firms in this sector are : DLR, COR, and DFT.

 

 

Appreciate it if anybody has any strong opinions on this subject.

 

 

[Guest wellmont]

reit's are perhaps one of the most overvalued groups now, and this group in particular is selling at all time highs. they might be doing well at the moment, they certainly have been "hot"; but could you explain how they fit into the VALUE investor's portfolio? that is what are they worth vs where are they selling?

[Hielko]

I don't think this is a business with a big moat or high switching costs. Multiple reasons:

 

* If you are running something big and important you probably already have a secondary location as a backup. This should make it relative easy to switch one of your locations because you can switch to your backup location during the switch.

 

* The expensive server hardware has a limited life: most servers are probably upgraded in a 2-5 timeframe. Easy to move your hardware if you are upgrading anyway.

 

* A lot of servers are virtualized and/or moved to the cloud. This makes the physical location of the server less important, and makes it a lot easier to move servers around.

 

Besides these observations about a possible 'moat', two other concerns:

 

* Developments in technology are moving faster for datacenters than for office's. A datacenter that is a few years old could possible need to compete with a newer one that has for example a more efficient cooling. This means expensive upgrades in the future, or a poor competitive position in the future.

 

* These REIT's seems to be very expensive based on the yield they produce. Doesn't seem attractive at all.

[ItsAValueTrap]

For customers with a single server, it seems to me that the business is more service-oriented.  Small customers may want some technical support (e.g. Rackspace/RAX is good at this).  There may be some value-add here if you can deliver great service in a cost-effective manner.

Service, reliability/reputation, and cost are probably key things customers look for.  Location is a minor concern as you don't go to the data center very often (only to install and when your server breaks down or needs to be replaced).

 

For larger customers, it gets to be more of a commodity business.  The largest customers tend to roll their own data center to drive down costs.  Google is the most extreme example of this... their whole data center design is fundamentally different than what Peer 1 (PIX.TO) is doing.  Google's servers don't have cases that impede airflow, Google has its own custom power backup solution, etc. etc.

 

Rackspace may be the best managed data center company and should grow the most over the long run.  (The valuation is very high though.)

 

*Shame on me for shorting some of these stocks as they sometimes get bought out for large premiums.

[constructive]

There's also CONE.  http://seekingalpha.com/article/1118621-ipo-preview-cyrusone

 

DFT might be the cheapest.