Switch Drops 15% After Q4 Print, But Two Sell-Side Firms Stick With Bullish Stories

Shares of Switch Inc SWCH lost more than 15 percent Tuesday morning and hit a new all-time low of $13.24 in reaction to the company's fourth-quarter earnings report. Nevertheless, BMO Capital Markets and Credit Suisse continue to see the bullish case for Switch's stock.

The Analyst

BMO Capital Market's Tim Long maintains an Outperform rating on Switch's stock with a price target lowered from $23 to $20.

Credit Suisse's Sami Badri maintains an Outperform rating on Switch's stock with an unchanged $22 price target.

Credit Suisse: The Numbers

Switch's revenue in Q4 grew 21 percent from one year ago to $99.3 million, which exceeded the $97.7-million estimate Badri was expecting, the analyst said in a research report. Adjusted EBITDA of $51.1 million — up 25 percent year-over-year — also exceeded the analyst's estimate of $49.9 million.

Switch's management guided its fiscal 2018 revenue to be $431.5 million at the midpoint and for capital expenditure guidance of $285 million, according to Credit Suisse. The revenue estimate was slightly ahead of the $431.3 million expected, although capex was $31 million higher. As a whole, the guidance appears "balanced" given the company's data center ramps and construction of new facilities to satisfy demand, Badri said. 

Looking beyond 2018, management's higher-than-expected capex spend is consistent with the company's long-term goals, the analyst said. 

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BMO: Room For Growth

Switch reported a "solid" Q4, highlighted by the following, Long said: 

• A revenue beat.
• Seventy-seven percent of revenue growth came from existing customers.
• The growth of both the colocation and connectivity segments saw an acceleration
• Overall churn of 0.3 percent continues to be an industry best.
• While gross and operating margins came in "a little light," adjusted EBITDA was $1 million more than expected.

Looking forward, Switch's decision to ramp Reno and Grand Rapids, with Atlanta joining next, is encouraging and should generate even more customer growth, the analyst said.

The company's energy buying consortium, Switched On, and a new solar initiative will reinforce its competitive advantage, Long said.

EBITDA growth should remain in the mid-to-high teens in the coming years, according to BMO. 

BMO's $20 price target is based on a 20x multiple on a 2019 adjusted EBITDA estimate of $267 million, which represents a premium to the data center REIT given its superior organic growth rate versus peers.

Price Action

Shares of Switch were last seen trading at $13.97, down nearly 12 percent on the day. 

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Photo courtesy of Switch.