CAPRE Exclusive | Credit Suisse’s Sami Badri Talks Tariffs, Views Valuation, and Asks Why Colocation is Accelerating Now

ATLANTA, GA – CAPRE’s Fourth Annual Greater Atlanta Data Center & Cloud Infrastructure Summit featured a keynote presentations by Sami Badri, Senior Analyst for Credit Suisse, titled “The Acceleration of Colocation in 2019,” which dove deep into questions large and small about the state of the data center supply chain – which covers everything from Juniper and CISCO to Equinix and Digital Realty. In this CAPRE Insider Report, we highlight some critical questions that Badri expounded on to illustrate why he thinks things are about to significantly accelerate on the adoption side.

Will Tariffs Impact Data Center CapEx?

First, Badri provided a bit of insight from the 2019 Credit Suisse CIO Survey that honed in on the impact of tariffs — drawing from the data illustrated in the slide above. “We asked them, following the imposed tariffs, are you considering public cloud services more with less on-premise deployments given the change in costs?” shared Badri. “Because if you remember, looking at the Trump tariffs, a lot of the equipment costs went up. In other words, when you ran your cost-benefit analysis to deploy your own public cloud versus the dominant public cloud services, did the tariffs all of a sudden change your decision?”

Badri shared that in January of 2018, 36% actually answered yes. But that response rate actually decreased by about 29% in July of 2019. “So despite the tariffs and despite the increased costs – in some cases, 25% fees added onto the equipment – you still have people more for the idea to actually spend money on equipment and deploy it to colocation sites,” he illuminated. “So this is once again a very positive data point for the industry, and it’s just getting more pronounced.”

Where is the Valuation of Data Centers?

Next, Badri referred to the slide above and zoomed out to look at a broader question — what is the current state of data center valuation? And what he shared was interesting. “Despite the first data points we saw, hyperscale capex numbers have decelerated. They went from 60% year-on-year growth in 2018 all the way down to about 10% growth in 2019,” he began. “Anyone who sees that number would say that’s pretty terrible. On top of that, the quarterly numbers coming from publicly traded operators, while being more positive than negative, were essentially a mixed bag. But despite that, if you actually look at the multiples, of where these publicly traded data center operators are actually trading, they are actually hitting all-time highs. Which is a very interesting dynamic.”

According to Badri, this means traders are perceiving future value. “The fair majority of these, from an analyst’s perspective or the investor’s perspective, is pricing in the fact that data centers are performing at their best, which is why they’re trading at an all-time high from a multiple perspective,” he explained. “In reality, the recorded results don’t actually warrant these kind of multiples, but despite that, you’re seeing all of the indicators pointing to very bullish outlooks on the data center industry. This ties into why I think a massive acceleration happening in the industry.”

Why is Colocation Adoption Accelerating Now?

“This ties into the next critical question I have, which is why has colocation adoption accelerated now?” he continued, gesturing to the third and final slide below. “Why has all of a sudden been triggered? Interestingly enough, if you track cloud on-ramps, SDN on-ramps, and you actually look at the fair majority of other next-generation applications, which are companies like CloudFlare, Cisco, Fastly, SalesForce, F5 Palo Alto, etc, what they’re doing from a Points of Presence perspective, they’ve been actually increasing their footprints around the world.”

In fact, they’ve been tackling key areas so that they can be more attractive by enterprises. “This dynamic is going to start increasing because several of these companies have actually changed their business models to adopt as-a-service type features,” predicted Badri. “What’s happening is, now you have a new type of tenant that you need to have to create the most compelling eco-system to attract enterprises.”

What is the Biggest Change Over the Last Six Months?

“So if I had to highlight the biggest difference in the last six months, which I can explain, and unrelated to capex, on-ramps, data center operator metrics, it’s that different types of companies are adopting these as-a-service business models, and deploying their on-ramps right next to the Cloud on-ramps. Right next to the software-defined networking on-ramps,” asserted Badri, who stressed that this is a very unique dynamic. “And you’re seeing it almost completely pronounced with publicly traded data center operators.”

Sami Badri, Senior Analyst, Credit Suisse

Badri then returned to the chart above for more detail. “This chart shows the number of PoPs by each individual company. Akamai is not surprising at the top, though CloudFlare is something I’d describe as an up-and-comer. In this middle you have these heavy deployers like Cisco & Fastly. Then at the other end, you see Palo Alto & F5, which are some new companies offering cybersecurity and workload balancing as a service,” he listed. “All of these new entrants are pulling enterprises in like a gravitational pull, connecting private network connections to streamline all applications in a network. This is a very unique dynamic that only become very pronounced in the last six months.”

For more coverage of Badri’s remarks, check out previous CAPRE Insider Reports:

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