Sami Badri Explains Growth of Hypercale CapEx Spending at CAPRE’s NYC Data Center Summit
NEW YORK, NY — According to Sam Badri, experts have significantly underestimated data center capex spending. But once you pop the hood, this massive influx of capital makes a lot of sense. Badri is a Senior Analyst for Credit Suisse, and a frequent contributor at CapRE Data Center Summits. At CAPRE’s 2019 New York Data Center and Cloud Infrastructure Summit, Badri had a lot to say about capex – where the industry is, how it got here, and why.
“Today we’re talking about the hyperscale capex trajectory. The most interesting thing about this metric is how we’ve been able to track and measure over time, and specifically, underappreciate it how it would grow,” began Badri, providing a lay of the land. “So we’re going to go over some of the reasons for that.”
Badri’s coverage model is a little bit different. “Most analysts cover real estate and telecom. I cover real estate, telecom, network equipment, and the entire technology supply chain, including the semiconductor chips that go into all of the equipment,” he explained. “We do a little bit differently to get some of these incremental value adds that not a lot of people are seeing on the surface.”
“So, this is the chart of the day,” he indicated, referring to the graphic above. “This is hyperscale capex growth. Hyperscale capex spend grew 48% year over year in 2018. This was a very dramatic bump, versus any period in history. The important thing about this number is that we didn’t anticipate 48% growth at the beginning of the year. it’s actually much further below that. and the important thing to remember actually, is our models today, at least the market is pricing and the growth, specifically with hyperscale and Cloud, is only anticipating about 16.8% growth in 2019.”
According to Badri, if you compare 2018 to 2019, it’s not that impressive, but there is one really important data point. “As I compared this data set and our models over time, just comparing January 2019 vs the data run yesterday, our forecasts have been off by a pretty big clip,” revealed Badri. “More specifically, the final numbers end up coming in about 894 basis points above our projected numbers just three months ago. So what that means is, hyperscalers are spending a lot more than what we were all anticipating. If you think about the actual dollars deployed, over time, what this does for my financial model, is that it lifts up the base level spend dramatically.”
Badri then asserted that this is why we started seeing the stock market climb above average – at least in the last three months. “All of a sudden we just had more capital being deployed into the industry. A lot more companies are recognizing revenues, and that’s flowing through into multiples and earnings,” he explained.
“I think this is actually a very important slide, because we seem to be getting this wrong constantly. This 48.2% was 39.3% three months ago. When I ran this exact data set in June of 2018, we were talking 27% year over year growth,” he added, preparing to conclude the introduction to his remarks. “So if you think about where we’re going here, we’re essentially underestimating by about 50%. That’s very important to know because this might actually be a recurring theme in the sector, in my opinion. “
“So what drove the 2018 capex strength? Where did the money actual go?” asked Badri. “There are four real drivers that got us to 48%. One is that GDPR took effect in May of 2018, even though things are very straightforward, you’d be surprised at how many companies – especially hyperscalers – were positive in spend, just to make sure that they understood the rules of the game very clearly, and then deployed their topology accordingly.”
Stay tuned for a future CAPRE Insider Report covering the rest of Badri’s remarks about the three other specific drivers behind data center CapEx growth. For more from Badri, check out previous CAPRE Insider Reports: