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#Bear Case
Added 2 months ago

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.

#Industry/competitors
stale
Added 12 months ago

Interested to see what the commonalities or not would be.

Data centre owner Equinix latest target of Hindenburg

Bloomberg

Short seller Hindenburg Research targeted data centre owner Equinix, alleging that the company manipulates its accounting and is selling an “AI pipe dream”.

Hindenburg’s disclosure of a short position and its allegations raise questions about the future for Equinix, which has been benefiting from the expectation that artificial intelligence companies will need even more data centres to power the technology.

Equinix shares fell on Wednesday in New York and the company pulled a previously planned bond offering after the report hit.

A representative for Equinix said the firm is investigating the claims.

Hindenburg alleges that the nearly $US80 billion ($122.5 billion) real estate investment trust is manipulating its accounting for a key profitability metric — adjusted funds from operations — and overstated that figure by at least 22 per cent in 2023. The short seller also said Equinix trades at elevated levels even if financials are taken “at face value”.

#Margins
stale
Added 2 years ago

Microsoft reported yesterday and highlighted in Azure the slowdown in cloud computing demand with the slowing economy - I'd assume this is temporary in nature and the strucutral trend is still up. What was interesting was the increase in electricity prices crimping margins being so massivley power hungry.

Might have some flow on effects to NXT.

#Capital Intensity
stale
Last edited 2 years ago

I don't follow data centres closely as I was always worried about technologic absolesence (Moore's Law) making it a very capital intensive business with the long term economics unclear especially given the commodity nature of the industrie and the hyperscaler opposition. I am by no means an expert and this is probably a very uninformed viewe, especially with smart investors like Gurav often citing how excellent these businesses are including Macquarie Telecom and Infratil.

I had not thought of privacy also being an issue - but this article is interesting in discussing this. The quote of replacing every 3 - 5 years if true (and I'm not sure on cost) seems like a rather short payback and profit period. - Why Big Tech shreds millions of storage devices it could reuse | Financial Times (ft.com)

Key quotes below:

Data centres usually upgrade their servers every three to five years, meaning most of the 11mn that were produced globally in 2017 will be decommissioned this year. 

 Although most data centre companies discard their storage devices after a few years, they could last for years — or even decades — longer, according to several industry experts. 

 “Clients are so worried about disposal of data that they’re insisting on the hard drives being destroyed,” says Michael Winterson of global data centre provider Equinix.

 Some of the major cloud computing providers have been taking steps towards reuse. Google says 27 per cent of the components it used in server upgrades in 2021 were refurbished inventory and that it overwrites data on its hard drives for reuse where possible. Microsoft now operates several circular centres” for refurbishing old servers and says more than 80 per cent of its decommissioned assets will be repurposed by 2024. But for hard drives, specifically, shredding is still the norm.