Data Storage Centers Undervalued Relative To Growth Prospects According To Stifel Nicolaus

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>>Data Storage Centers Undervalued Relative To Growth Prospects According To Stifel Nicolaus

TWST: How are stock prices holding up now? Do you see these companies being fairly valued?

Mr. Weller: I think there is still upside. I think these stocks got way oversold because of everything I talked about earlier. There was just a lack of appetite for risk, period, and then you add on the high leverage, the negative - those are characteristics that were just not attractive to people. And one thing that is true, too, is that there is still a fresh memory of the past, of the issues this space faced back in 2001. Exodus went bankrupt. These stocks were disastrous. It was a nightmare, and there are a lot of people who still remember that. And so I think that hurts the group, too, but I think what people are starting to feel more comfortable with is that businesses are different today. The customer base is higher quality, the demand is real, and you don't really have the over-capacity situation you did back then or the high-leverage levels. I think those are key differences. In terms of what's going to drive the stocks from here, I think for an Equinix and Switch, they've got to continue to show that they can put up 20% to 25% growth rates and deliver on the EBITDA side, and I think people will get more comfortable with these models. Looking at past multiples, for Equinix we just raised our target to $100, which is still meaningful upside from here. So I think there is more room to grow. Rackspace is a little tougher, you don't have a lot of history. And it's a little bit of a different model, so it's not exactly right to compare it to these vendors. But we think that as the SMB market improves from a macro perspective, that that will drive an improvement in growth in Rackspace. Right now we're modeling a 15% revenue growth forecast, but we think those could ultimately return to 20% to 25%, and so Rackspace has the potential to get on the screens of more growth investors. It's also a name that still has a relatively low institutional ownership. When they did that auction IPO, they ended up having a pretty big retail investor base. And so Rackspace over the last nine months has been really aggressive at getting out in front of institutions, telling the story. One of the things that's a little bit interesting is that there were some clear overhangs or concerns over this group if you go back to the second half of 2008 and early 2009, concerns that you were going to have issues with the businesses, that growth was going to slow significantly, that churn was going to spike. And just over the last quarter, it didn't seem that there were big issues or overhangs out there.