There has been a surge in enthusiasm around data centre companies, with the high-growth investment sector captivating markets worldwide. However, veteran stock market investor Shankar Sharma cautions that this excitement may be more of a “hope trade” and may be lacking the right economics.
In a recent post on social media platform X, Shankar Sharma drew a parallel between data centres and the telecom tower industry, saying that “it broadly resembles that Telecom Tower business in which the tower company invests massively in Capex and then leases out the capacity to various telecom companies.”
He added that while the data centres serve a wider customer base, the core business model remains capital-intensive and leasing-driven. He believes that in this business, the bargaining power always lies with the customers.
Customers often play providers against each other to secure the lowest possible rates, compressing margins and limiting pricing power, according to him.
Sharma said, “Data centres are a capex guzzling business (like an industrial warehouse), and once you have capex in the ground, you are at the mercy of the various customers who can play one against the other to get very low rates.”
Data centre stocks like Netweb Technologies, Black Box, and Anant Raj have zoomed 25-100% in the last six months, reflecting the boom in demand among investors.
Alarm Bells
Sharma warned that the data centre industry carries many of the risks typical of leasing businesses, including significant leverage on balance sheets and cyclical cash flow challenges. “ROIs will trend down, cash flow will be largely negative most of the time,” he stated bluntly.
He suggested that investors should recognise that despite the sector’s perceived glamour and association with tech. Sharma concluded, saying, “Play the bubble if you want, but remember the economics are not at all sexy.”
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
