2023-06-19 02:30:38 ET
Summary
- DigitalBridge Group focuses on digital infrastructure investments, aligning with long-term trends like 5G, cloud computing, and AI/ML workloads, allowing for rapid growth and an asset-light business model.
- DigitalBridge's distinct approach offers an alternative to traditional tower or data center REITs, tapping into the convergence theme observed in next-generation networks and benefiting from strong secular trends.
- Despite being the fastest-growing investment manager in the industry, DigitalBridge's valuation is significantly higher than its peers, leading to my hold rating for the stock.
Investment Thesis
DigitalBridge Group, Inc. ( DBRG ) has a distinct investment approach that focuses on digital infrastructure, which aligns with the long-term trends of 5G, cloud computing, edge computing, and AI/ML workloads. These sectors provide a strong foundation for the company's asset-light business model, enabling it to grow rapidly. Despite potential economic challenges, digital infrastructure is considered a defensive asset class with ample room for additional investment. While DigitalBridge's growth prospects outshine those of its peers, its valuation is significantly higher than peer average. Although DigitalBridge is the fastest-growing investment manager in the entire industry, I remain cautious due to the elevated valuation multiple and assign a hold rating to DBRG stock.
Q1 Review: Strong Fee Revenue
DigitalBridge reported strong fee revenue results in the first quarter of 2023, aligning with expected Fee Related Earnings (FRE). The company successfully raised $700 million in FEEUM ((Fee Earning Equity Under Management)) during the quarter, resulting in a total FEEUM of $28 billion, including assets managed by AMP. The management restated their target of raising an additional $8 billion in FEEUM in 2023, with $2 billion coming from Core and Credit, $2 billion from Co-Invest, and $4 billion from DBP III. Although I believe DigitalBridge can achieve this goal, the uncertain timing of FEEUM inflows in the current volatile financial market, coupled with an uncertain macroeconomic outlook, poses challenges. While DigitalBridge's management is confident in its fundraising outlook based on internal strategic plans, the current environment presents challenges for capital formation and valuations of alternative asset managers.
Building a Premier Global Digital Infrastructure Platform
DigitalBridge is establishing itself as a leading global digital infrastructure platform through its Digital Investment Management ((IM)) and Digital Operating ((DO)) divisions. Previously known as Colony Capital, the company has shifted its focus exclusively towards a portfolio of digital infrastructure companies. Within its portfolio, DigitalBridge holds investments in 23 digital companies, spanning data centers, towers, fiber, small cells, and edge infrastructure. The Digital IM targets investments in dynamic, high-growth digital infrastructure firms, which may exhibit fluctuating operational performance. However, the Digital IM business ensures stable and predictable asset management fees for DBRG investors. On the other hand, the Digital Operating business concentrates on more stable businesses with mid- to high-single-digit growth rates, backed by proven business models and consistent operating results typically supported by long-term contracts with escalators. Currently centered around data center companies, the Digital Operating segment is anticipated to expand into towers, fiber, and small cells/edge infrastructure in the future. DBRG offers investors a global platform to participate in the promising growth of digital infrastructure, which is expected to continue expanding rapidly over a considerable time horizon.
Significant Tailwinds Behind Distinct Business Model
DigitalBridge's distinctive business model, characterized by high-growth and reduced asset ownership, offers a novel approach to investing in digital infrastructure. Unlike traditional Tower or Data Center REITs like American Tower or Equinix, which typically involve full asset ownership, DigitalBridge's strategy allows investors to tap into the convergence theme observed in next-generation 5G and cloud-based networks. Notably, even traditional Communication Infrastructure REITs are now moving towards this convergence path, with examples such as American Tower's acquisition of CoreSite and investments in edge strategies, as well as Crown Castle's increased focus on Fiber/Small Cells. From an asset manager perspective, DigitalBridge's approach offers investors an alternative means to capitalize on these themes through three key factors. First, it adopts an asset-light approach in a traditionally capital-intensive sector. Second, the portfolio companies under DigitalBridge possess highly skilled leadership with a proven track record. Finally, it provides an opportunity to benefit from the broader convergence theme, distinguishing itself from public Communication Infrastructure REITs that lean more towards pureplay Tower or Data Center models. Given the enduring secular trends tied to 5G, cloud, edge computing, and data-intensive AI/ML workloads, digital infrastructure is viewed as a defensive asset class with substantial potential for additional fund inflows, even in a challenging macroeconomic environment.
Valuation
Players in the alternative asset manager industry trade at a wide range of valuation multiples, typically between 10-20 times distributable earnings. While DBRG may not be as well-known as other firms in the industry, a larger portion of its revenue comes from high-margin digital investment management fees rather than capital-market activities or balance sheet-intensive operations like KKR & Co. Inc. ( KKR ) or The Carlyle Group Inc. ( CG ). When compared to the median valuation of all alternative asset managers, including those with lower multiples, DBRG is currently trading at a significant premium multiple. Although DBRG is the fastest-growing investment manager in the entire industry, I remain cautious due to the elevated valuation multiple and assign a hold rating to the stock.
Conclusion
DigitalBridge is constructing a leading global digital infrastructure platform through its Investment Management and Operating businesses. The IM segment currently manages $28 billion in Fee Earning Equity Under Management. The company focuses on investing in dynamic digital infrastructure companies that exhibit high-growth potential, despite potential fluctuations in their operational performance. By doing so, DigitalBridge ensures a steady and predictable flow of asset management fees for DBRG investors. Both businesses benefit from strong long-term trends driving growth in the sector. I remain optimistic on the company's growth trajectory and positioning in the market; however, the stock trades at a significantly higher multiple compared to peers in the alternative asset manager industry, which is why I currently assign a hold rating to the stock.
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DigitalBridge Group: Solid Positioning But Valuation Remains High