DBRG - Jim Chanos' short case on data center REITs challenged by Wells Fargo

Legendary short seller Jim Chanos is raising capital to bet against data center REITs like Digital Realty ( NYSE: DLR ), Equinix ( NASDAQ: EQIX ) and Uniti Group ( NASDAQ: UNIT ), but Wells Fargo analyst Eric Luebchow warns that his short case is misguided.

Chanos' thinking behind shorting data center REITs "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,” he told the Financial Times in an interview on June 29. In other words, Chanos thinks hyperscalers will want to self-build instead of leasing with third-party providers.

However, hyperscalers are finding it increasingly difficult to self-build in the wake of tight supply and long delivery lead time for equipment and power, Luebchow wrote in a note to clients Thursday. Hyperscalers are estimated to outsource up to 60% of their requirements "as their own supply chains struggle to keep pace with underlying demand," he added.

The hedge fund manager's "argument is not only unoriginal, as we have heard the same short thesis for over 5 years, but in conflict with the current and past behavior of the hyperscalers," Luebchow said, adding that "we don't think he understands the data center market very well."

Meanwhile, Jefferies analyst Jonathon Peterson believes data center REITs are among some of the best suited sub-sectors for a stagflation environment . They "can mostly pass through rising power costs to customers via higher rents," he wrote in a note Thursday.

More data center REITs: American Tower ( NYSE: AMT ), Crown Castle International ( CCI ), Iron Mountain ( IRM ) and DigitalBridge Group ( DBRG ).

Take a look at why SA contributor Mike Zaccardi views Equinix as a Buy .

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