Investidea: Switch, because there is no time for games

Инвестидея: Switch, потому что тут не до игр

Today we have a very speculative idea: take the company, data center manager Switch (NYSE: SWCH), to capitalize on the growth of the cloud computing sector with it.

Growth potential and duration: 15,5% for 15 months excluding dividends; 11% annual during 15 years including dividends.

Why stocks can go up: demand for the company's services will grow.

How do we act: we take shares now by 26,8 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. Hopefully, you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what are we writing, Are forecasts and hypotheses, not a call to action. It is up to you to rely on our thoughts or not..

And what about the author's predictions

Research, for example this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would perform better than people, but alas, they work worse.

Therefore, we do not try to build complex models.. The profit forecast in the article is the author's expectations. We indicate this forecast as a guideline. As with the investment in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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Investment editorial office

What the company makes money on

The company has nothing to do with the Nintendo game console. She manages data centers. According to the company's annual report, its revenue is divided into the following types:

  1. Renewable — 96,61%. Switch collects fees from customers for the use of its premises and maintenance of client servers. All this is done on the basis of renewable contracts, so the company's revenue is predictable.
  2. Non-renewable — 3,39%. This is what, what the company collects from customers once when installing their equipment.

Almost all the money the company receives from customers in the United States. The share of revenue from customers from other countries is less 2%, but unknown, how much exactly.

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Revenue by type of customer:

  1. IT, software development and cloud computing — 24%.
  2. E-commerce — 15%.
  3. Digital Media and Entertainment – 13%.
  4. Financial Institutions — 12%.
  5. Healthcare — 8%.
  6. Unnamed industries — 28%.

Инвестидея: Switch, потому что тут не до игр

Инвестидея: Switch, потому что тут не до игр

Arguments in favor of the company

Clouds are even more promising, what it seems. Usually in the case of companies, working in the field of cloud computing, I speak, that this sector will grow and there will be a lot of money there. it, generally, So. But recent events are an escalation of the war between Amazon and Google, Alibaba and Microsoft for Hegemony in the Cloud Business – Suggest, that there will be even more money in this area, what it seems.

These four Internet giants have bottomless pockets and a desire to develop their own cloud segments.. Which means, companies like Switch can count on the growth of financial indicators, so and so, that they will be bought by one of these big players.

In absolute numbers, the Switch is not very expensive - $ 6.49 billion, so that its quotes will be susceptible to the inflow of investor money. Buying a company by someone like Microsoft won't be very expensive., especially against the backdrop of current U.S. M&A activity.

Green sky. The company has invested a lot in the development of energy efficiency and clean energy. It even has data centers, where the food is on 100% give renewable energy sources. In this sense, the Switch looks significantly stronger than many competitors.. And of course, Switch trumpets this in its reporting and presentations..

Considering, that the ESG lobby actively encourages quotes for environmental friendliness and punishes for non-environmental friendliness, I think, that the company's shares will lose something from this.

What can get in the way

Concentration. According to the annual report, 36,9% the company's revenues give the largest 10 clients, but unknown, exactly how much the largest clients give. Very possible, that one of them gives alone more 10% proceeds. Reviewing relationships with any of these clients can have a negative impact on reporting..

Accounting. The company has $ 2.174 billion in debts, of which 159.236 million should be repaid during the year. At the same time, the company does not have much money at its disposal.: approximately 39 million in accounts and 31.554 million counterparty debts.

The company pays 21 cent of dividends per share per year, what is 0,8% annual, it takes her about 27 million a year — 61,36% from her annual profit. In the last quarter, the company generally recorded a loss due to large expenses., including debt servicing.

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Generally, the company has a lot of debts, and, most likely, debt burden will grow, because Switch has a big need to invest in business development. So dividends can cut, but this is unlikely to lead to a serious drop in quotations. But growing debt is a problem.: it can scare off investors in an era of rising rates and rising credit prices..

I think, in this regard, switch will be motivated to engage in additional issue of shares, which can negatively affect quotes, if there is not enough demand for the shares, and new stocks will dilute the value of existing ones.

Price. Company P / E — 155.55 and P / S — 8,1. This guarantees volatility in the stock., and also significantly limits the premium to the current price of the company. However, a similar company CyrusOne was bought with a premium 25% to the price before the offer of sale - and its P / E thus grew to 213. But in any case, the Switch is expensive and is now trading close to historical highs., and that can't but bother you..

What is the bottom line

Shares can be taken now by 26,8 $. And then there are a couple of options for action.:

  1. wait, when stocks exceed historic highs and are worth 31 $. I think, that given the above factors – mainly the intensification of the confrontation between the major players in the field of cloud computing – we will reach this level in the following 15 months;
  2. hold shares 15 years.

It is important to consider, that c 1 January 2023 Switch will become a REIT. But in practical terms, it means, what, most likely, Switch's dividend payouts will rise markedly over the long haem as they go., how the company's customers will spend more and more on its services.

The idea is quite speculative, and if you're not ready, that quotes will storm, then stay away from these promotions. After turning a company into a REIT, you should monitor the news section on its website, to have time to sell shares earlier, how investors in Russia will be able to respond to the cancellation or reduction of payments.

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