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Why CyrusOne Is a Great Long-Term Bet on Data

By Michael Lewis - Feb 27, 2014 at 12:00PM

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The colocation data center business is thriving. With a strong chance of stock price appreciation and an attractive dividend payment, CyrusOne may be one of the best ways to play data.

The "cloud" by now is an old term and not as exciting as it once was, but the industry's growth remains robust. Instead of jumping onboard with the incessantly analyzed, richly priced pure plays on the cloud industry, investors can look at third-party businesses that service the massive growth. An example of this is CyrusOne (CONE). CyrusOne is an enterprise-level data center owner and manager with strong potential offered to investors at a relatively reasonable price. The company, which has only been available to public investors since mid-January of last year, has barely broken even in terms of stock price, but those short-term movements fog an otherwise attractive business. Here's the latest.

Earnings update
In CyrusOne's fourth quarter, sales rose 25% to more than $72 million as the company continues to add its colocation enterprise data centers around the country. Funds from operations and adjusted funds from operations rose 40% and 54%, respectively. For REITs and real estate-centered businesses, FFO and AFFO are the go-to measurements for evaluating the performance of the assets.

CyrusOne is quickly making its presence known on the East Coast of the U.S. (a previously underserved region) with the addition of 14 acres outside of Washington, D.C., in northern Virginia. The expected customer base for the future development is obvious. The company also picked up an additional 22 acres in Austin, Texas.

For the full year, the company generated $72.4 million in AFFO, aiding the company in bumping up its dividend payment an impressive 31% to $0.21 per share.

Why it works
It's an oversimplified explanation, but CyrusOne's line of business is in high demand that will remain there for years to come. As data increasingly becomes the currency of the future, businesses and governments will need more enterprise solutions than ever, and CyrusOne's focus on colocation centers makes perfect sense. Colocation is cost-effective for clients as they are pretty much turnkey data centers available for lease.

CyrusOne's success in renting its locations is noteworthy. Utilization was at 85% in the recent quarter, and the company has a rent churn rate of just more than 1%. This also makes CyrusOne's revenue easily forecasted -- a rarity among tech-centered businesses.

At nearly 36 times forward earnings, CyrusOne isn't going to attract the bargain hunters in the investment world, but its substantial growth prospects and near-4% dividend yield make for a very attractive growth stock. Investors can be sure that CyrusOne's sales and cash flow will grow in the coming years, and could very likely see substantial capital appreciation as the company becomes a larger player in the industry. With the added bonus of quarterly income, the stock leaves little for investors to dislike.

Michael Lewis has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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