Cowen Questions Data Center Operator Switch's 'Overall Strategy'

The premium valuation of Switch Inc SWCH is unjustified, according to Cowen. 

The Analyst

Cowen analyst Colby Synesael initiated coverage of Switch shares with an Underperform rating and $15 price target, suggesting 12-percent downside from current levels.

The Thesis

Switch's growth, though at the higher end of the comparable group, is not meaningfully above and "appears likely to decelerate," Synesael said in a Friday note. (See the analyst's track record here.) 

The analyst said he is unconvinced about the overall value add of Switch's design, given that many other data centers have high uptime and operate at similar power usage effectiveness.

The focus on high redundancy, which is important for enterprise customers but not as important for hyper-scale providers who are building redundancy into the network, is resulting in relatively low net operating income for Switch compared to comps, Synesael said. 

Redundancy is when additional or alternative data center are made available when the original data center goes down.

Switch may not be able to replicate the same number of connectivity options its Las Vegas campus provides in other locations such as Grand Rapids and Atlanta, Synesael said. This is due to the network providers seeing less benefit in establishing a presence in locations other than Las Vegas, he said. 

"At the same time we question the overall strategy to build in non-Tier 1 markets and believe the company's return profile is at best in-line with comps." 

The Price Action

Since their Oct. 6, 2017 listing, shares of Switch have shed about 19 percent.

At the time of writing, the shares were slipping 1.91 percent at $16.70.

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4 Analysts Issue Their First Research Notes On Switch

Photo courtesy of Switch. 

Posted In: Cowen. Colby Synesaeldata centersAnalyst ColorPrice TargetInitiationAnalyst Ratings

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