Business Breakdowns

Jim Chanos: A Short Thesis on Data Centers - [Business Breakdowns, EP. 103]

Mar 29, 2023

Jim Chanos, a Wall Street legend known for his skeptical investment strategies, shares his insights on the fragile state of US data center REITs. He critiques traditional data centers, discussing the impact of hyperscalers and cash burn issues. Chanos also highlights the rising interest costs and ongoing financial difficulties faced by these REITs, contrasting their challenges with the rapid growth of hyperscalers. Furthermore, he emphasizes the importance of a contrarian mindset in investment, particularly for short sellers navigating a changing market.

42:44

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Jim Chanos

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Quick takeaways

Legacy data centers face significant challenges with poor returns on capital and increased competition from hyperscale cloud providers like Amazon AWS and Microsoft Azure.

The valuations of legacy data center stocks are currently unsustainable, and the industry may face downward pressure due to the dominance of hyperscalers and the impact of private equity involvement and rising interest rates.

Deep dives

Short Thesis on Data Center Reads

The podcast episode features an interview with Jim Chainos, a well-known short seller. He discusses his short thesis on data center reads, specifically focusing on legacy data centers. Chainos highlights the flawed business models of co-location legacy data centers, where returns on capital have been consistently low and even negative. He argues that the rise of hyperscalers like Amazon AWS and Microsoft Azure, offering cloud-based data storage solutions, has further worsened the economics of legacy data centers. Additionally, he points out the excessive valuations of data center stocks in the market. Chainos also explains how private equity entering the data center space at high prices and the potential for rising interest rates could further impact the industry. He concludes by discussing the broader concerns in commercial real estate and the challenges banks and office real estate are currently facing.

Intro

2min

Analyzing the Viability of Data Center REITs

5min

The Financial Landscape of Data Centers

10min

Data Center Financial Dynamics

9min

Valuation Concerns in the Digital Real Estate Market

2min

Navigating Data Center and Office REIT Challenges

12min

Navigating the Hedge Fund Landscape: The Importance of Variant Perception

4min

Compound248 is back to host another episode of Business Breakdowns. His most recent podcasts have focused on digital infrastructure and today we continue with that theme, but with a twist. Our guest is Wall Street Legend Jim Chanos, famed for bringing a skeptical eye to a credulous world. Together, we walked through his short thesis on the US Data Center REITs, his bear case for commercial real estate, and some broader wisdom on how management can thoughtfully respond to short sellers. Let's get started.

For the full show notes, transcript, and links to the best content to learn more, check out the episode page here.

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Show Notes

(00:03:30) - (First question) - His counter-narrative thesis of shorting traditional data centers

(00:09:34) - How data center hyperscalers have been shifting the industry since 2016

(00:12:14) - The size, margins, and depreciation profile of the data center industry

(00:16:14) - The cash burn problem with digital REITs

(00:18:30) - How he thinks about interest rates, liquidity, and leverage in the space

(00:20:25) - More on why the value of these data centers is so elusive

(00:21:57) - The extent to which macro tech slowdowns intersect with his thesis

(00:23:13) - What investors see in these businesses that he discounts

(00:26:59) - Risks for the short and the bull case for data centers

(00:29:04) - Big concerns about the broader commercial real estate market

(00:36:34) - The best way for operators to handle a short thesis about their company

(00:39:49) - Critical mistakes he recommends managers avoid

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Business Breakdowns

Jim Chanos: A Short Thesis on Data Centers - [Business Breakdowns, EP. 103]

Episode guests

Podcast summary created with Snipd AI

Quick takeaways

Deep dives

Short Thesis on Data Center Reads

Challenges Faced by Legacy Data Centers

Economic Risks in Legacy Data Centers

Real Estate Concerns in Commercial Real Estate

Remember Everything You Learn from Podcasts