Cyxtera Technologies: Indirect Play on Growing Data Demand (NASDAQ: CYXT)

piranka

Summary

I recommend a BUY rating on Cyxtera Technologies (NASDAQ:CYXT). CYXT has an excellent infrastructure and is well known in the global market. As long as investors can withstand the short-term share price volatility caused by its debt earnings, I believe CYXT will be rewarding if it meets my expectations for growth and profitability.

Company presentation

I think the current price of CYXT shares is lower than the actual value of the company. CYXT’s infrastructure is top notch and the company is well known in international trade. All of these factors are more than enough to convince any potential investor to put their faith, resources and money into the business.

Wide geographical scope and ecosystem

The brand of CYXT is all over the world. Their main markets are in North America, Europe and Asia. Due to the geographic impact they have had, they are able to provide solutions to businesses, service providers and government agencies wherever they want to be. These consumers want to be close to population centers, customers, employees and service providers. They need the right minds to support their growth with deployments in multiple data centers across multiple markets, and CYXT is the best bet for them. CYXT is able to meet the growing needs of its strong customer base due to its total power capacity of 245MW and available expansion capacity of 40.7MW which is balanced across CYXT’s platform.

It is very important to note that their data centers are deliberately positioned and located in major metropolitan markets globally, close to commercial and financial centers, major connectivity groups and a wide range of center customers of data, including various global enterprises and leading hyperscale cloud providers. This geographic reach allows them to meet all of their customers’ needs, which includes meeting those customers where they want to be and also supporting their growth with deployments in multiple data centers in different markets. In the long term, all of these elements have placed CYXT in a position where it will continue to grow and create an advantage for them over new market entrants and regional players.

Almost all of CYXT’s data centers have low latency connections to major public cloud zones and access to 40,000 physical and virtual interconnects on their neutral colocation and interconnect platform operators. Due to the reliability of its interconnection platform, CYXT is able to attract businesses, media and content creators, service providers and other entities who would prefer to access CYXT’s various networks by one place.

TAM

Spac Bridge

Top notch facilities

CYXT’s portfolio includes high-quality Tier III data center facilities. The Tier III data center facility is synchronously sustainable with redundant components as a key differentiator, with redundant distribution paths to serve the critical environment. These centers are all always on board because the redundant infrastructure allows them to maintain their equipment or replace it without necessarily shutting down the entire installation. The preventive maintenance program ensures that all infrastructure is always in good condition and will meet and even exceed industry standards. All of these ensure customer availability, as they have been available 99.999% of the time for the past few years.

Customers can easily connect to other businesses and partners, as well as a wide variety of network service providers, public cloud service providers, and other service providers, through the interconnect solutions that make up the backbone of a global data center platform that serves as an ecosystem. CYST’s mission is to streamline the process by which customers consume, deploy, access and manage solutions for their IT infrastructure. Their state-of-the-art, software-defined and API-driven solutions make it all possible.

Major actor

Spac Bridge

A diverse customer base reduces revenue risk

CYXT has a customer base of over 2,300 which is extremely diverse. Their clientele is mainly made up of large corporations and government entities. A large percentage of their customer base consists of cloud, information technology and network service providers, creating a harmonious ecosystem with enterprise customers contributing the rest of CYXT’s revenue. From 2021, Lumen (LUMN) accounts for approximately 11% of their annual revenue, and their top 20 customers, excluding Lumen, contribute approximately 25% of total revenue. They also have long-term relationships with their top 20 clients that have lasted for over 14 years.

Customer base

S-1

Cloud-like agility and intelligent automation combined with a seasoned executive team are key competitive advantages

The goal is to provide solutions that will enable customers to fully utilize their ability to compete in today’s digital economy. CYXT makes sure of this by offering customers the financial and operational flexibility of the cloud along with the performance and security of an enterprise-grade infrastructure.

IoT sensors have been used to share real-time temperature and humidity data and provide customers with tools to automate recurring tasks. It shows that they are really committed to integrating automation into all aspects of the business.

A good team is very necessary in the life of any business, and CYXT has a management team. This alone shows a solid balance in the data center industry and related technology and telecommunications industries. I firmly believe that with this, CYXT will continue to be a significant force in the industry to be reckoned with.

Evaluation

At the current share price of $2.62 and 178.6 million shares, the market capitalization is approximately $470 million. I believe the current valuation does not reflect fair value and provides a good entry point. That said, investors should be prepared for extreme volatility given CYXT’s level of leverage. I would like to point out that my model did not take into account the revaluation of the valuation to its historical average. Any positive change in multiples would have a major impact on equity value. Therefore, the returns might be better than I expected.

My estimates are largely in line with the consensus, which revolves around management guidance. I believe CYXT will achieve $890 million in sales and $329 million in EBITDA in FY25. This will be driven by organic sales growth and margin expansion through growing utilization, which will give it a market cap of $674 million and a stock price of $3.77 in FY24, assuming it trades at 8x in FY24.

Hypotheses:

  1. Sales: Follow consensus estimates through FY25 as CYXT continues to gain market share
  2. EBITDA: to track consensus estimates through FY25 as CYXT continues to increase utilization at existing centers, which exhibit high incremental margin
  3. Valuation: I assume there is no change in the valuation and should continue to be valued using the current EBITDA multiple of 8x for FY24.

Evaluation

Norman capital

Risk

An ever-changing technological landscape

As the days go by, the industry is also changing. New trends appear, technology also changes rapidly, customers have new requirements, and of course there is the industry standard. CYXT’s power and cooling systems are difficult and expensive to upgrade, and they may not be able to effectively upgrade these systems to meet these new demands without breaking the bank.

Entry barriers

The industry has no competitors due to barriers that hold back new entrants. CYXT will always be under threat from new entrants from well-capitalized companies in the adjacent market.

High debt level

CYXT has incurred more than $2 billion in debt on its balance sheet. Additional pressure is exerted on equity value when operating results fluctuate. Moreover, the current rising rate environment is not exactly healthy for CYXT.

Conclusion

The current stock price of CYXT does not reflect its fair value. There are a number of things that will determine whether or not a company will continue to thrive and dominate the industry in which it finds itself. One of the important things is to have a team of great intellectuals who are committed to seeing the company move forward. . CYXT probably has that. Moreover, there is a place to have a huge clientele. Customers from different branches of industry, and of course CYXT has that and more. CYXT has an excellent infrastructure in place, and they are recognized in the global market as well. To name a few, all of these reasons are more than enough for any investor to invest their time, trust and money in the company in my opinion.

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