Switch Impresses BMO With First Quarterly Report: 'A Long Runway For Future Growth'

Switch Inc SWCH has impressed Wall Street firms with its first quarterly report as a public company. Investors, though, apparently are unimpressed and bid down its stock.

The Analyst 

BMO Capital Markets analyst Tim Long reiterated his Outperform rating on the shares of Switch and a $23 price target.

The Thesis 

Switch reported solid third quarter results, with modest upside to BMO Capital Market's revenue and adjusted EBITDA estimates, Long said in a Monday note. (See Long's track record here.)

About 68 percent of the growth came organically, while the remaining 32 percent from new customers, the analyst said. 

Despite gross and operating margins trailing estimates, adjusted EBITDA of $50 million was slightly above BMO's $49 million estimate.

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"Gross margins in the quarter benefitted from Switch becoming an unbundled energy provider in Nevada, which added 300bps to gross margin," Long said. Highlighting the differentiation and stickiness of offerings, Switch added 29 new customers and reported churn of only 0.3 percent, according to BMO.

Fiscal 2017 revenue and EBITDA guidance were in line with Long's estimates, but capex guidance exceeded his expectation, he said. Switch has a "long runway for future growth as utilization rate increase and new capacity is added and filled," Long said. 

BMO Capital Markets increased its revenue and EBITDA estimates for 2018 and 2019 slightly.

The Price Action

At last check, Switch shares were sliding 5.70 percent to $18.86, although trading above the offer price of $17.

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Switch's Q3 Beat A Sign Of Things To Come, Says Credit Suisse