Wall Street veteran Jim Chanos has made a name for himself over the years by shorting stocks. His claim to fame was shorting Enron before it filed for bankruptcy in 2001. That was one of many high-profile and profitable short positions Chanos' investment firm, Kynikos Associates, has taken over the years. 

In an interview with the Financial Times, Chanos recently revealed his firm's latest short thesis. He's shorting Digital Realty (DLR -0.52%) and Equinix (EQIX -1.26%), the largest real estate investment trusts (REITs) focused on operating data centers. While Chanos is betting against these stocks, I'm taking the other side of that trade. Here's why. 

The short thesis

Chanos believes that legacy data center operators will face growing competition from large tech giants Amazon (AMZN -1.54%)Alphabet (GOOG -1.00%) (GOOGL -1.05%)Oracle (ORCL -1.73%), and Microsoft (MSFT -1.41%), which are currently some of their biggest customers. Chanos told the Financial Times:

This is our big short right now. Their three biggest customers are becoming their biggest competitors. And when your biggest competitors are three of the most vicious competitors in the world, then you have a problem. 

Chanos aims to raise several hundred million dollars for a fund that will short U.S. listed data center REITs. After a significant amount of consolidation over the past year, only two remain (Equinix and Digital Realty) for Chanos to short.

Why I'm not buying the short thesis

While Chanos has made a name for himself as a successful short seller, the thesis that large cloud providers like Amazon, Microsoft, Alphabet, and Oracle will insource data center capacity seems unlikely. They currently rely on Equinix and Digital Realty to support their cloud networks. For example, Equinix has a 42% share of the Amazon Web Services market, 43% of Microsoft Azure, 44% of Google Cloud, and 56% of Oracle, with Digital Realty holding the second-largest share of those cloud markets.

Meanwhile, the overall demand for data center capacity is exceptionally strong these days. Equinix CEO Charles Meyers commented on what his company is seeing in its first-quarter earnings press release. He said:

Underlying demand for digital infrastructure continues to rise as enterprises in diverse sectors across the globe prioritize digital transformation and service providers continue to innovate, distribute and scale their infrastructure globally in response to that demand.

Digital Realty sees the same thing. It reported record bookings in the first quarter, powered by strong demand for data center solutions. 

Because demand is so strong, both companies continue to expand their data center capacity. Digital Realty currently has 44 expansion projects underway (an all-time high) across 28 metro areas. It has already presold 58% of that capacity, reflecting strong customer demand for space in third-party data centers. Meanwhile, both companies continue making acquisitions to expand their global data center platforms. 

Finally, some of the smartest investors in the world are bullish on the data center space. Private equity giants Blackstone (BX -2.68%) and KKR (KKR -3.15%) both bought data center operators in the past year. Blackstone paid $10 billion for QTS Realty, while KKR partnered with another private equity fund to buy CyrusOne for $15 billion. Blackstone noted that QTS aligns with one of its highest conviction themes of data proliferation.

With digital transformation taking more business processes online, the industry needs more data center capacity to support the flow of data. Blackstone and KKR see surging data usage driving the need for more outsourced data center capacity, which is why they invested billions of dollars in buying data center platforms. 

I'm taking the other side of this trade

Chanos has made a lot of money shorting the stocks of companies that would go on to fail. However, I don't think that will be the outcome of his short against data center REITs. Even if the cloud giants go from customers to competitors, demand for third-party data center capacity should remain strong because of how much data infrastructure the industry needs to support digital transformation. Because of that, I plan to take advantage of the lower share price following Chanos' short reveal to add to my position in these data center REITs.