The Last Mile: Issue 5
“Cloud” is a catch-all term for data storage and digital compute that is managed “off-premises” (i.e., generally in a data center). A raging debate happening both on Wall Street and in Silicon Valley is what the pace of cloud growth is going to be.
Of course, the answer is, “it depends.”
It depends on if we care about 2023 or the long-run. It depends on if we are talking about the US, developed international, or emerging markets. It depends on whether we mean public cloud vs. private cloud. It depends on how new technologies like generative AI evolve. It depends on a lot of things.
Each of the subsegments of digital infrastructure (e.g., towers, fixed-line connectivity, data centers) care about cloud growth, but data centers are impacted most acutely - the cloud, quite literally, lives inside data centers. Interestingly, over the past several years, most of the US-based publicly traded data center holding companies have been acquired: QTS, CyrusOne, and Switch are three prominent examples.
That leaves only two major publicly traded data center companies in the US: Digital Realty (Ticker: DLR) and Equinix (Ticker: EQIX). Companies ranging from Amazon (Ticker: AMZN) and Meta (Ticker: META) to Iron Mountain (Ticker: IRM) and Cogent Communications (CCOI) own key data center assets, but Digital Realty and Equinix are the two primary pure-plays.
BYTE’s index provider, IO Digital, selects the 40 constituents in the BYTE Index from a universe of digital infrastructure companies globally. As of a rebalance, the index always has at least 65% exposure to the US - with only two real US-based options, BYTE’s US data center exposure is limited.
The BYTE Index rebalances twice yearly. To select the constituents, IO Digital uses a proprietary algorithm that ranks the universe of digital infrastructure companies by a blend of what it characterizes as “Growth, Soundness, and Value.” At the last rebalance, this generally favored fixed-line connectivity > towers > data centers.
The result of this is that, even as the debate over cloud and data center growth has intensified, the combination of the limited supply of publicly traded US data center companies and the algorithm’s design has led to a decline in the BYTE Index’s exposure to US data center companies. This creates both risk and opportunity for the index’s performance and is worth monitoring over the coming year.