The idea of picking winners in today's market -- instead of avoiding losers -- isn't at the forefront of many investors' minds as the stock market remains down on the year. But turbulent times are often the best opportunities for snagging stocks that can offer big rewards over time. One company that holds great potential is the data-center operator Switch (SWCH). Here's a closer look at the company today and why it could be pay off nicely in the long run.
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A closer look at Switch
Switch has more 5 million square feet of data-storage space in its portfolio, which is leased to 1,350 diverse customers in its six sprawling campuses. The campuses are located in five strategic locations across the country, called Switch Primes, and help the company serve the different data needs of each region of the U.S.
Switch is in the process of converting to a real estate investment trust (REIT), which will give it some favorable tax advantages and help cut costs. The transition is set to be complete at the end of 2022 or early 2023 and is certainly a welcomed move because it will help boost performance while also adding to its dividend return since REITs are required to pay at least 90% of taxable income to investors in the form of dividends.
Its 2021 performance fell short when compared to 2020 largely because of depreciation recapture from assets sold, higher interest costs, and a $35 million lawsuit with Cobalt Data Centers, which is now resolved. But fourth-quarter 2021 earnings were strong and seem to be a good indicator for what's in store in 2022. Switch is expecting a 13% growth in revenue in 2022 as well as a notable jump in earnings before taxes, interest, depreciation, and amortization (EBITDA). The company has three developments underway, one of which will be completed in 2022, adding to its Las Vegas campus. Looking at 2024 and beyond, there is a lot more room to expand, with the company having seven planned developments over the next five years.
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Data center demand isn't wavering
Switch has been in operation since 2000, consistently using state-of-the-art designs when building its campuses to meet new efficiency requirements and operation standards for the industry. Its prime campuses also operate on 100% renewable power, helping offset data centers' tremendous energy needs and lower costs for the company. There are headwinds data center operators are facing when it comes to supply chain disruptions, which can cause delays in receiving necessary parts of equipment for operation. But Switch has started designing and developing a lot of its equipment to help offset delays and competition for parts.
While nothing has been confirmed as of yet, there is speculation that the company could be bought out in the near future. A buyout wouldn't be out of the norm since private-equity firms and other data-center operators are acquiring smaller data operators at an incredible pace. Over the past year, CyrusOne was acquired by KKR and Global Infrastructure Partners for $15 billion, communications REIT American Tower acquired CoreSite for $10.1 billion, and Blackstone acquired QTS for $10 billion.
As demand for technology grows, more and more companies need a place to safely and securely store and process data. Switch, along with several other data operators, directly serves the growing demand in our digital economy. Switch shares trade for more than 167 times its normalized earnings, which means it is very richly valued. This number should improve in 2022 as its operations level out and expenses decline from 2021. Given the limited options for investing in data centers after recent acquisitions, Switch is in a prime position to make investors very happy over the next decade despite its premium pricing.
