Brick-and-mortar, or legacy, data centers are in full focus after Jim Chanos revealed that they are his next short target. The founder of Kynikos Associates, now known as Chanos & Company, disclosed that he is raising several hundred million dollars to create a fund that will short data center real estate investment trusts (REITs).
Chanos sprang into the mainstream investing world after successfully shorting Enron due to “deceptive accounting practices.” The acclaimed investor has an estimated net worth of $2 billion. During March, he also announced a short position in Coinbase (NASDAQ:COIN) due to accelerating competition. COIN stock has declined by more than 70% since March 1.
Now, Chanos has data centers set as his next short target. He explained, “This is our big short right now. The story is that although the cloud is growing, the cloud is their enemy, not their business. Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centres.”
Let’s get into the details.
Billionaire Jim Chanos Plans to Short Legacy Data Centers
Data center REITs like Digital Realty Trust (NYSE:DLR) and Equinix (NASDAQ:EQIX) are both in the red today following Chanos’ disclosure. However, he did not explicitly mention which REITs he intended to short.
Chanos believes that large cloud providers, like Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google will prefer to build proprietary data centers instead of using existing ones. When these providers do outsource, they usually offer low returns to the outsourcer. As a result, legacy data centers are at risk of further competition and market-share loss.
Meanwhile, he also believes that data center REITS are overvalued in general. Furthermore, Chanos notes that data center REITs trade at premiums compared to the largest cloud companies. He stated, “The real problem for data centre Reits is technical obsolescence. Their three biggest customers are becoming their biggest competitors. And when your biggest competitors are three of the most vicious competitors in the world then you have a problem.”
On top of that, Chanos believes that if the market selloff continues, short sellers will be able to reap big rewards. He added that current market conditions are “very similar to the post-dotcom era.”
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.