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President and founder of Kynikos Associates, Jim Chanos, said in an interview Wednesday that they are short legacy data centers, sending stocks in the sector reeling.
The Financial Times reported Chanos as stating it is their “big short right now,” adding that “although the cloud is growing, the cloud is their enemy, not their business. Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centers.”
Data centers are warehouses filled with servers that store data accessible via the internet. However, while data stored in the cloud is, in fact, held in data centers, Chanos is shorting the legacy firms associated with the data centers.
The growth of the cloud has in recent years, fueled investment in data center-related companies.
However, in a tweet thread, Chanos said: “The cloud (and data) is growing, but legacy data center operating incomes are shrinking. Yet the data center REITs trade at huge premiums to the actual cloud companies.”
In addition, he was quoted as saying that “when your biggest competitors are three of the most vicious competitors in the world then you have a problem,” presumably speaking about Amazon Web Services (NASDAQ:AMZN), Google Cloud (NASDAQ:GOOGL), and Microsoft Azure (NASDAQ:MSFT).
“The real problem for data center Reits is technical obsolescence,” explained Chanos. “Their three biggest customers are becoming their biggest competitors.”
While Chanos didn’t specify which company or companies he was short in the sector, he shared a slide with companies mentioned including Digital Realty Trust (NYSE:DLR), Equinix (NASDAQ:EQIX), CoreSite Realty (COR), CyrusOne (NASDAQ:CONE), Switch, Inc. (NYSE:SWCH), and QTS Realty Trust (NYSE:QTS).
