Dgtl Infra has been discussing the investment thesis behind digital infrastructure across our content. However, there are investors, particularly hedge funds, who are making bets against the digital infrastructure sector by short selling certain stocks. Undoubtedly, a lot can be learned about which publicly-traded digital infrastructure stocks investors are betting against in relatively greater or lesser amounts.
Below, we provide an overview of the short interest as a percentage of the float in 19 of the most followed digital infrastructure stocks that trade on U.S. indices, a comparison of the key changes between current short interest & short interest from one year ago and possible rationale as to why certain stocks may be shorted more than others.
Towers – Digital Infrastructure Stocks
Tower companies enjoy stable business models, characterized by:
- Recurring revenue
- Rental escalators, which are typically 3% in the United States
- Long-term contracts, with an initial term of 5 to 10 years
- High operating leverage or incremental margins
- Low maintenance capital expenditures
- Leases to strong investment-grade tenants (e.g., AT&T, Verizon, and T-Mobile)
In summary, the tower business model is less complex and has been easier for investors to understand, positioning it on the low-risk end of spectrum. Given the strength and durability of the tower business model, it has created limited volatility for investors, from an earnings perspective. Therefore, towers represent a very small short position for investors overall (seen below), as compared to other sectors in digital infrastructure.
American Tower (AMT)
Short interest as a % of the float, has decreased from 0.9% to 0.8% over the past year.
Crown Castle (CCI)
Short interest as a % of the float, has decreased from 1.4% to 1.1% over the past year.
SBA Communications (SBAC)
Short interest as a % of the float, has decreased from 1.5% to 1.0% over the past year.
Data Centers – Digital Infrastructure Stocks (United States)
Equinix (EQIX)
Short interest as a % of the float, has decreased from 1.2% to 1.1% over the past year. Potential rationale includes:
- Equinix has continued to execute in growing its scaled business, with the strongest ecosystem at low leverage levels
- Equinix is a consensus long for many investors and thus short interest has remained low
Digital Realty (DLR)
Short interest as a % of the float, has decreased from 8.0% to 2.8% over the past year. Potential rationale includes:
- Digital Realty closed its $8.5bn acquisition of European data center provider Interxion in March 2020
- Further, recent quarters have generated strong leasing volumes, to the point where Digital Realty has no inventory to lease to new customers. This point is particularly true in key markets like Northern Virginia
CyrusOne (CONE)
Short interest as a % of the float, has increased from 3.1% to 6.6% over the past year. Potential rationale includes:
- Significant management turnover in 2020 has given investors some concern. Specifically, the company installed a new Chief Executive Officer in July 2020, a new Chief Operating Officer in October 2020, and a new Chief Financial Officer in October 2020
Iron Mountain (IRM)
Short interest as a % of the float, has increased from 14.5% to 18.9% over the past year. Potential rationale includes:
- Iron Mountain derives most of its revenues from rental fees for the storage of physical records (meaning paper documents) and computer backup tapes. Clearly, this business segment is exposed to significant secular risk from the digitization of records and shift away from physical storage
- Iron Mountain is included as a digital infrastructure stock because the company also operates 14 data centers. The facilities are spread across 13 global markets, with total power capacity of 122 megawatts
CoreSite Realty (COR)
Short interest as a % of the float, has decreased from 4.1% to 1.5% over the past year. Potential rationale includes:
- CoreSite is increasingly being appreciated for its difficult to replicate assets, which are located in high-demand, Tier 1 locations across the United States
- Lately, investors have grown more comfortable with CoreSite’s large customer churn events in 2020 and 2021 of 9 MW in one of its Santa Clara, California data center facilities
- CoreSite has also underperformed its data center peers over the past 12 months and thus investors may believe that the company does not have significantly further downside
QTS Realty Trust (QTS)
Short interest as a % of the float, has increased from 10.5% to 14.2% over the past year. Potential rationale includes:
- QTS has had above average growth in its data center capacity and lease-up ability relative to its peers. However, investors have become increasingly concerned about QTS’ ability to grow per share figures, specifically operating funds from operations per share (OFFO per share)
- Continued elevated levels of capital expenditures to build-out new data center facilities will require incremental equity raises and thus pressure per share metrics further
Switch, Inc. (SWCH)
Short interest as a % of the float, has decreased from 16.2% to 6.0% over the past year. Potential rationale includes:
- Revenue concentration concerns have lessened over the past year
- Switch generates significant revenue from data centers located at its Core Campus in Las Vegas, which comprised 89% of the company’s revenue during 2019
- A significant disruption to the Las Vegas location could materially affect the company’s business. For example, a catastrophic event, or a prolonged disruption in this region pose potential risks
- Switch also has data centers in Grand Rapids, Michigan and Reno, Nevada which opened in 2016. As the development of both locations continue, their revenue will help offset some of the concentration from the Las Vegas facility
Data Centers – Digital Infrastructure Stocks (China)
GDS Holdings (GDS)
Short interest as a % of the float, has decreased from 21.7% to 12.2% over the past year. Potential rationale includes:
- Although GDS has seen its short interest decrease by 9.5% over the past year, which is considerable, its short interest as a % of the float remains high at 12%
- Indeed, GDS is has been shorted by a number of different hedge funds. For example, short seller Blue Orca Capital has written extensively about the company
- Particular points from the short seller perspective are i) GDS potentially inflating the purchase price of undisclosed related party acquisitions and ii) not having enough true earnings to support its debt load
21Vianet Group (VNET)
Short interest as a % of the float, has increased from 0.6% to 2.6% over the past year.
Fiber – Digital Infrastructure Stocks
Lumen Technologies (LUMN)
Short interest as a % of the float, has decreased from 11.5% to 10.2% over the past year. Potential rationale includes:
- Lumen’s more than 10% dividend yield acts as a floor to the stock valuation given that, near-term, the dividend is secure. As a result of the company’s significant free cash flow generation, even amidst COVID-19-related headwinds, the dividend is secure
- Additionally, investors have been reducing their short Lumen positions based on the perceived risk-reward of the short position as the stock has continued to trend down in 2020
Cogent Communications (CCOI)
Short interest as a % of the float, has decreased from 5.0% to 2.1% over the past year. Potential rationale includes:
- Cogent has underperformed its fiber peers over the past 12 months. Thus, investors may believe that the company does not have significantly further downside
Uniti Group (UNIT)
Short interest as a % of the float, has decreased from 12.9% to 6.6% over the past year. Potential rationale includes:
- In September 2020, Uniti’s largest customer, Windstream Holdings, emerged from Chapter 11 bankruptcy. Specifically, Windstream represented 65% and 84% of Uniti’s 2019 revenue and EBITDA, respectively
- Following Windstream’s emergence from bankruptcy, Fitch upgraded Uniti’s credit rating to B+ (Stable) from CCC (Positive)
Consolidated Communications (CNSL)
Short interest as a % of the float, has decreased from 15.7% to 8.0% over the past year. Potential rationale includes:
- In October 2020, Consolidated Communications entered into an agreement with Searchlight Capital, who will make a strategic investment of $425m
- Coupled with Searchlight’s investment, Consolidated is able to upgrade 1 million homes with fiber passings
- Importantly, upon closing of Searchlight’s investment, Consolidated raised $2.25bn in new secured debt and retired all $2.0bn of its previously outstanding debt
GTT Communications (GTT)
Short interest as a % of the float, has increased from 41.8% to 45.5% over the past year. Potential rationale includes:
- GTT’s short interest is highest among the digital infrastructure stocks covered in this article
- Indeed, GTT is known to have been shorted by a number of different hedge funds. For example, short seller Wolfpack Research has written extensively about the company
- In addition to its operational struggles, GTT has also experienced excessive management turnover, disclosed an accounting review, and delayed its earnings releases to investors, amongst other missteps
Small Cells, Distributed Antenna Systems and Other – Digital Infrastructure Stocks
Colony Capital (CLNY)
Short interest as a % of the float, has increased from 2.1% to 10.6% over the past year. Potential rationale includes:
- Investors have some skepticism over Colony’s desire for accelerated disposition of its legacy real estate assets. Specifically, these real estate segments consist of hospitality, healthcare, and other equity & debt
- Further, skepticism could also be placed on Colony’s shift to its digital infrastructure investing business. Colony’s pivot is focused on towers, data centers, fiber and the combination of small cells and distributed antenna systems
Boingo Wireless (WIFI)
Short interest as a % of the float, has decreased from 11.6% to 7.6% over the past year. Potential rationale includes:
- Boingo has underperformed its digital infrastructure peers over the past 12 months. Thus, investors may believe that the company does not have significantly further downside
