IFT NXT ASX: The wall of money heading for data centres has short-sellers excited
High-profile hedge fund manager Jim Chanos has warned of dangers that an investment boom in data centres could result in far too much capacity, casting doubt on the record prices assets in the sector have attracted.
Mr Chanos founded Kynikos Associates, once the largest short-only money manager in the United States, and is best known for his bet against utility giant Enron before its collapse in 2001. He was also a critic of WorldCom, the second-largest telecommunications utility in the US before its collapse.
WorldCom had spent heavily on a fibre optic cable network based on overly optimistic expectations of internet traffic growth, and in 2002 admitted to falsifying profits in one of the world’s largest accounting scandals.
The growth in data centre valuations – as big technology firms grapple for more capacity for increasingly complex artificial intelligence processes – has captured the imagination of investors around the world.
Last year, US asset manager Blackstone made its single biggest investment ever in buying AirTrunk, in a deal that valued the Australian data centre business at more than $24 billion. It has plans to invest $US100 billion ($154 billion) into the data centre sector in coming years.
Mr Chanos, in a series of posts to social media platform X, compared the boom in data centre projects to the overinvestment in fibre optic networks two decades earlier. “I can still hear the fibre optic cable guys saying demand was ‘infinite’ in 2000 because internet traffic was doubling every quarter (it wasn’t),” he wrote in response to a post that claimed the demand for data centres was so great that the sector could never build enough capacity.
“Internet usage was roughly doubling every year, not every quarter. So 2x annually, not 16x … I teach this as part of the WorldCom (they were making the quarterly claim) case in my course,” said Mr Chanos, who is also a lecturer at Yale University’s School of Management.
‘Off the mark’
Australian developers, however, are bullish. Craig Scroggie, the chief executive of NextDC, one of the largest ASX-listed data centre businesses, said Mr Chanos had made a similar forecast more than 12 months ago.
“The past year has shown how off the mark he was,” Mr Scroggie said. “There has been record global bookings for data centres, driven by continued growth in cloud [computing] and just the beginning of AI. Comparing fibre to data centres? Apples and oranges.”
Mr Chanos has previously expanded on his bearishness about data centres, saying last year that their biggest clients, companies such as Amazon and Microsoft, would become the most significant competitors to developers.
While Mr Chanos has had several successful short positions, making $US100 million from shorting German payments business Wirecard, which in 2020 filed for bankruptcy, he has also lost money betting against companies. Most notably, he had been very bearish about Tesla, which has defied his predictions with its market capitalisation soaring over several years.
On Monday, ASX-listed infrastructure investor Infratil said the value of its near 50 per cent stake in Canberra Data Centres had risen by $113 million in the three months since its last assessment on September 30.
The New Zealand firm now puts the value of its 48.17 per cent share at between $4.48 billion and $5.38 billion, implying a total valuation in the range of $9.3 billion and $11.1 billion for the business.
Infratil’s valuation is highly conservative compared with what bankers hired to sell a slice of the data centre operator are hoping they can achieve. The Australian Financial Review’s Street Talk column reported last month that the Commonwealth Superannuation Corporation is seeking to sell half its stake in Canberra Data Centres at a $16 billion valuation.
Infratil also told investors it would pour another $250 million into Canberra Data Centres over the next two years on top of a $433 million investment announced in December to fund the growing demand.
Shares in NextDC were almost 2 per cent higher, trading at $15.39 on Tuesday, after a note from brokers at Citi argued the Brisbane-based company would benefit from Microsoft’s plan to spend $US80 billion ($128 billion) this financial year building out data centres.
“One of the investor concerns on NextDC has been industry feedback that the next set of contracts has been pushed out,” Citi’s Siraj Ahmed wrote, forecasting that shares could rise to $20. “While we have not been able to confirm that contracts have been delayed, even if it were to be true, we see this as likely temporary especially given Microsoft’s capex plans.”
Ross Barrows, head of technology research at Wilsons Advisory, said he was feeling “very constructive” about the outlook for the local data centre sector over the next three years. “We expect to get greater insights into the trends and tailwinds for NextDC, CDC and the like at the upcoming Pacific Telecommunications Conference in the US in mid-January,” he said.
