Data center designer and technology infrastructure company Switch Inc SWCH's second-quarter earnings report and disappointing guidance prompted JPMorgan to drop its bullish stance.
The Analyst
JPMorgan's Richard Choe downgraded Switch from Overweight to Neutral with a price target lowered from $17 to $13.
The Thesis
Switch reported Monday afternoon with an in-line earnings report but lowered its 2018 guidance, Choe said in the downgrade note. (See the analyst's track record here.)
The company's sales forecast revision implies mostly flat revenue and margin performance from a year ago — which is disappointing, as Switch was expected to show a revenue ramp and margin improvement, the analyst said.
Switch did report a record backlog of large deals in the pipeline and a very low churn rate of less than 0.1 percent, Choe said.
The data center company's growth appears to have been delayed to 2019 or beyond, which should have investors positive on the company's long-term strategic vision the analyst said. Investor concern with elevated spending should ease as new campus openings ramp capital expenditure down to $65 million per quarter, or $260 million annually, which Choe said is favorable compared to expectations of $265 to $310 million in 2018.
Switch's growth story and long-term favorable outlook remain unchanged, although a shift away from a bullish stance on the stock is warranted at this time due to slower growth, according to JPMorgan.
Price Action
Switch shares were plunging 27 percent to $10.20 at the time of publication Tuesday.
Related Links:
What Started In Vegas Isn't Staying In Vegas: Switch Goes Global
Data Center Operator Switch's Business Model Snags Vote Of Confidence From Stifel
Photo courtesy of Switch.
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