4 Analysts Issue Their First Research Notes On Switch

Switch IncSWCHfirst day of trading on Oct. 9.

Goldman Sachs: Premium Business But Premium Valuation

Goldman Sachs' Jiorden Sanchez initiated coverage of Switch's stock with a Neutral rating and $18 price target. Switch is a premium colocation provider able to differentiate itself from the competition with a portfolio of more than 350 patents, along with four at-scale data center campuses, Sanchez wrote in the initiation note. As such, the company is well positioned to capitalize on favorable industry-wide trends, especially those in data traffic, big data and cloud computing.

Switch also boasts the lowest churn rate among its peers (1.4 percent versus average of 7.0 percent), above average returns (15.0 percent versus average of 11.3 percent) and the highest growth rate (16.2 percent versus average of 12.3 percent).

However, the stock is also trading at 23.1x 2018 EBITDA, which represents a 25 percent premium versus the peer group average of 18.7x. This premium is nevertheless justified given the superior growth profile and a 1.4x PEG ratio which is below the 1.6x peer average.

Credit Suisse: More Power For Less

Credit Suisse's Sami Badri initiated coverage of Switch's stock with an Outperform rating and $22 price target.

Switch's business is particularly attractive because it is "one of the purest ways" for investors to gain exposure to the cloud segment, backed by its large patent portfolio, the analyst said in his research report. But the company's most notable attribute is its ability to distribute "immense amounts of power" to its clients at or below market pricing rates.

Meanwhile, the entire Multi-Tenant Data Center market is projected to grow at a 9 percent compounded annual growth rate over the next five years. But, Switch should be able to grow at twice that rate which implies the company's EBITDA margins will likely come in higher than its peers. Also, the company is projected to accelerate its revenue growth to 21 percent by fiscal 2019, which is notably ahead of its peers.

Finally, a $22 price target is based on a weighted average of three valuation methods:

1. 17.5x 2019E AFFO.
2. 17.0x 2019E EBITDA.
3. A discounted cash flow assuming a 7.2 percent WACC and 4.8 percent terminal growth rate.

Related Link: Switch Turns Off Some Investors With Its Pricey Valuation

BMO: Best In Class Player

BMO Capital Markets' Tim Long initiated coverage of Switch's stock with an Outperform rating and $23 price target.

The case for owning Switch is based on the analyst's proprietary analysis to use serve deployments to better predict the colocation opportunity for companies like Switch and its peers. In the period through 2021, Switch's workloads in the cloud will grow at a compounded annual growth rate of 39 percent and drive colocation server rack growth of 17 percent. By comparison, most industry estimates are calling for just a 10 to 15 percent colocation growth.

"We believe that Switch's patented data center designs enable better TCO drive the lower churn rates," the analyst wrote. "Switch has achieved a Tier IV data center classification, which, coupled with the ability to offer denser deployments and the CORE telecom purchasing cooperative, delivers significant savings to the customer and increases customer stickiness.

Finally, Switch has a path toward realizing $3 billion in revenue by simply filling its existing data centers and then populating those it plans to build.

In addition to the three initiations above, Benzinga earlier covered Citi's initiation on the stock. Citi holds a Neutral rating and $20 price target on Switch.

Related Link: Cramer Likes The Data Center Industry But Isn't A Buyer Of Switch