The data center market has seen massive consolidation over the last year and a half. In this clip from "Real Talk" on Motley Fool Live, recorded on March 25, Motley Fool contributor Tyler Crowe discusses the demand in the industry, the costs and challenges to build data centers, and why Switch (NYSE:SWCH) might be receiving some attractive offers to go private.
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Tyler Crowe: They're a relatively new company. They've been going through this strange "What kind of corporate do we want to be?" One of the things obviously with data centers is they're expensive to build. It's not just putting up an industrial warehouse. HVAC is through the roof because heat is the death of anything related to computers, storage because they're throwing off heat all the time. You got HVAC requirements, electricity requirements, and then you start looking at connectivity. They call them Cloud on-board ramps, basically, your proximity to Amazon (NASDAQ:AMZN) Web Services, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Cloud, anything that's like a big cloud. A player having direct, quick connections to them is called an on-ramp. There's a lot of things when it goes into the actual building of them, so to build these things, you need a lot of capital. One of the things Switch has struggled with a little bit is they want to build on these things. Their founder is somebody who specializes in data center design and has these really cool designs to optimize performance of the facility. But it's just hard to get financing, and so cost-of-capital for them is a little bit higher, so they've been talking about converting to a REIT. That's something that they wanted to do. Then, there was just recently news that went out, I believe Bloomberg or Reuters (NYSE:TRI) reported it, that they are considering strategic alternatives, which typically means somebody want to buy us. One of the reasons they're probably considering that is, like Matt said, we've seen massive consolidation in this space over the past 12,18 months. Equinix (NASDAQ:EQIX) was just buying up. QTS Realty (NYSE:QTS) got bought by Blackstone (NYSE:BX). CyrusOne (NASDAQ:CONE) is getting bought by KKR (NYSE:KKR). The valuations that they're getting for going private are very attractive right now. With those things considered, it's very possible that Switch might not even be a public company that much longer if people are looking at the singling. This is a really good company. They got a lot of opportunity to grow and could be a great operator in the space. Why not?
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Tyler Crowe owns Alphabet (A shares), Amazon, CyrusOne, Equinix, and Switch. The Motley Fool owns and recommends Alphabet (A shares), Amazon, Equinix, KKR, and Switch. The Motley Fool recommends Alphabet (C shares) and CyrusOne. The Motley Fool has a disclosure policy.
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