Analysts Hold The Line On Switch After Q3 Earnings Miss

Data center operator Switch Inc SWCH once again disappointed investors with a third-quarter earnings miss Tuesday. 

The Analysts

• Credit Suisse analyst Sami Badri reiterated an Outperform rating on Switch with a $14 price target.
• Citigroup analyst Michael Rollins maintained a Buy rating.
• Raymond James analyst Frank Louthan maintained a Market Perform rating.

Credit Suisse: New Customers A Positive

Notwithstanding a deceleration in connectivity and co-location growth, Switch reported revenues and adjusted EBITDA ahead of Credit Suisse's expectations, Badri said in a Wednesday note.

The analyst forecast EBITDA margins of 48.5 percent for 2019 and 48.7 percent for 2020, following a contraction in 2018.

Existing customers contributed to about 43 percent of revenue growth in Q3, a slowdown from 59 percent in Q1, 61 percent in Q2 and 90 percent in Q4 of 2017, Badri said. 

That said, Badri expressed comfort with Switch's new customer business, which he said is positive for future business ramps.

Switch attributed Tuesday's results to new enterprise hybrid cloud projects that will take more than 12 months to full deploy and several years to ramp up, according to Credit Suisse. 

Citi's Thesis Remains Intact 

Switch's Q3 results were largely in-line with the consensus, and it maintained its previously revised 2018 outlook, Citi's Rollins said in a note.

Lengthening book-to-bill and sales cycle are restraining near-term revenue, and some of the issues appear to be customer-specific, the analyst said. 

Rollins is of the view that results and commentary may not meaningfully influence expectations for 2019, as investors cannot gauge future revenue potential without the knowledge of renewals versus new business.

"We believe our thesis is still intact, while we expect shares to trade flat or down near-term, following results." 

Citi stuck with its Buy rating, attributing its stance to Switch's opportunities for improving sales, enhancing disclosures, maintaining financial flexibility and capturing multiple expansion.

Raymond James On Sidelines Due To Slower Growth Profile

Switch's bookings represent over $39 million of annualized revenue, which could drive higher revenue going forward, Raymond James' Louthan said.

That said, the analyst sees stalling in the organic growth story due to a delay in the opening of an Atlanta campus. 

"Switch has the capacity to produce the best organic growth of the domestic U.S. providers that we cover, but with the slower growth profile we believe investors will wait for an inflection before getting behind the shares." 

The Price Action

Switch shares have lost roughly half their value year-to-date. The stock was down 19.55 percent at $7.45 at the time of publication Wednesday. 

Related Links:

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4 Analysts Issue Their First Research Notes On Switch

Photo courtesy of Switch.