Cowen Names CyrusOne, Digital Realty As Top Data Services Picks

A handful of companies in the data services sector are on deck to report earnings. After a disappointing performance in the fourth quarter for the sector as a whole, the group is expected to show a "marked improvement," with CyrusOne Inc CONE and Digital Rlty DLR being top picks, according to Cowen.

The Analyst

Cowen's Colby Synesael maintains a Buy rating on CyrusOne's stock with an unchanged $127 price target. The analyst also maintains a Buy rating on Digital Realty's stock with an unchanged $127 price target.

The Thesis

Cowen projects that CyrusOne will report first-quarter bookings of more than $30 million, driven by a new 10-megawatt deal with Microsoft Corporation MSFT, a 6-MW deal with salesforce.com, inc. CRM and a 3-MW deal with Alibaba Group Holding Ltd BABA, Synesael said in a Wednesday note. (See the analyst's track record here.)

I's likely that CyrusOne held discussions with Microsoft for incremental storage space in San Antonio, Texas, but unlikely that an agreement was finalized in Q1, the analyst said. 

Digital Realty is expected to report bookings of $55 million, which would be in-line with last quarter's $56-million figure, the analyst said. Notable bookings are coming from several deals of 6 MW or less, including with Microsoft, Salesforce and SAP SE (ADR) SAP, according to Cowen. The company is also likely in discussions for a 3 MW-plus deal at its Reston, Virginia facility with CoreSite Realty Corp COR and the deal could close in Q2, Synesael said. 

The sector is likely to benefit going forward from deals of 10 MW or less, driven by an expanding list of hyperscale providers that are growing but don't need the same amount of space as "heavyweight" mega-cap companies, the analyst said. 

The rising rate environment could be seen as a positive for the larger public data center providers, as it could force smaller players to consolidate at a faster pace, the analyst said.

"This consequently could bring further pricing rationality to the space and likely will create more M&A opportunities for public operators," Synesael said. 

Price Action

Shares of CyrusOne were up 0.43 percent at $51.49 at the close Wednesday, while shares of Digital Realty were up slightly at $101.47. 

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