2019 Data Center Sector Demand Remains
Strong Despite Lowered DLR FY19 Outlook
■ See our 2019 Outlook – For an in depth view of our 2019 projections and
coverage, see our "2019 Outlook – The Cloud Has Four Walls (2019
Edition)," covering both communications equipment & infrastructure.
■ 2019 Views on Communications Infrastructure: - We have summarized
our views for 2019 in the body of this note for INXN, EQIX, SWCH, CONE,
DLR, COR, and QTS in the pages that follow. We recently introduced
coverage of INXN with an Outperform rating and $70 Target Price. See our
INXN initiation report, “Positioned in a European Rising Tide,” for more
details on our view. Interest rates will be an increasing concern for the data
center operators through 2019, but we see evidence of continuing strong
demand that will enable fundamental strength for the companies that are
best-positioned, such as INXN and EQIX.
■ Reliance on Colocation is Strengthening Across the Technology
Industry: Highlighted in our outlook, we identify increasing evidence that
global colocation demand and reliance on the data center infrastructure
asset class are only increasing based on two comprehensive industry
surveys from global IT spending decision-makers. These surveys highlight
increasing IT budget spending on colocation, a greater proportion of IT
racks going into colocation, on premise data centers falling out of favor,
and outsourced wholesale capacity increasing, all of which are positive
signals for the industry overall.
■ Digital Realty (DLR) Issued Initial 2019 Guidance Below Street
Expectations: DLR has released their 2019 guidance along with updated
2018 guidance to account for accounting adjustments. These updates
reflect lowered expectations in light of greater than anticipated impacts
from lease accounting changes (ASC 842). In light of the updated
guidance, we adjust our 2018/2019 Core FFO to $6.65/$6.70 from
$6.66/$6.76, respectively, and maintain our 2020E at $7.04.
■ InterXion Initiation – Positioned in a European Rising Tide: We
recently released our initiation report for INXN, “Positioned in a European
Rising Tide.” We observe the growing influence of EQIX and DLR on the
European colocation and interconnection markets, which has the potential
to drive up prices and shift trends toward charging for interconnection on a
greater scale. The European market typically has not treated
interconnection the same way as the American and Asian markets have in
which it is a vital growth segment for data center operators. If EQIX and
DLR can successfully shift trends towards the more American model in
Europe, INXN stands to benefit tremendously as it already has seen
success without reliance from a large interconnection revenue segment.