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After famed short-seller Jim Chanos said that he is raising more than $200 million to short REITs that own legacy data centers, Wells Fargo analyst Eric Luebchow told investors not to believe the hype.
The premise of Chanos’ short case is that the cloud is the “enemy” of the data center companies, as hyperscalers will increasingly prefer to self-build rather than lease from third-party providers.
While Chanos didn’t specify which company or companies he was short in the sector, in a tweet, he shared a slide with companies mentioned, including Digital Realty Trust (NYSE:DLR), Equinix (NASDAQ:EQIX), CoreSite Realty, CyrusOne (NASDAQ:CONE), Switch, Inc. (NYSE:SWCH), and QTS Realty Trust (NYSE:QTS).
However, Luebchow said Chanos’s argument is “not only unoriginal, as we have heard the same short thesis for over 5 years, but in conflict with the current and past behavior of the hyperscalers. Chanos may have made some discerning bets on past shorts like Enron, but we don’t think he understands the data center market very well.”
“Hyperscalers are Outsourcing MORE, Not Less in Current Environment. Historically, we estimate 40-50% of hyperscale capacity demands have been outsourced to the third-party market. However, tight supply and long delivery lead times for equipment and power have made it increasingly difficult for the hyperscalers to self-build. We estimate this year the hyperscalers will outsource up to 60% of their requirements as their own supply chains struggle to keep pace with underlying demand. These issues will not likely resolve any time soon,” the analyst argued.
He added that hyperscaler capacity demands are far too great to completely insource, while the hyperscale community is broader than Chanos realizes.
“Chanos’s thesis makes even less sense for a company like EQIX, which controls many key interconnection exchange points across the globe. EQIX, outside its xScale joint venture, typically does not sign hyperscale leases as a replacement for a self-build,” added Luebchow.
“We view Chanos’s short case as nothing more than a temporary distraction that is uninformed by the reality of the data center market today. His sweeping generalizations ignore a litany of tangible evidence that contradict his claims, including record bookings,” he concluded.
