China Demand And Available Land Will Advance AI Inferencing

Key Takeaways

• GDS Holdings' positioning in Tier 1 markets and flexibility in customer deployment aid in managing resources and enhancing financial stability.
  
• Strategic order wins and deconsolidation actions support growth and improve future revenue prospects and financial value creation.
  
• Dependence on AI demand in top markets, strategic uncertainty, financial unreliability, and high debt pose risks to revenue growth and net margins.

Catalysts

Develops and operates data centers in the People's Republic of China.

• GDS Holdings is well-positioned in Tier 1 markets, with significant available land and power to meet the increasing demand for AI inferencing from the largest cloud and Internet companies in China, which could drive future revenue growth.
  
• The strategic focus on flexibility in customer deployment timing, combined with strong asset monetization capabilities, enables GDS to manage financial resources effectively, potentially improving net margins and financial stability.
  
• The company's high-volume new order wins, such as the 152-megawatt order from a major hyperscale customer, suggest strong future revenue prospects and efficient capital expenditure management, positively impacting earnings.
  
• GDS's strategic decision to wait and observe the chip supply situation allows it to remain agile and adapt to market conditions, which can lead to better capital allocation and improved net margins.
  
• The successful deconsolidation of DayOne to become an equity investee provides potential for future financial value creation, supporting growth in earnings as DayOne continues to commit to large-scale projects and expands its sales pipeline.

GDS Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GDS Holdings's revenue will grow by 13.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.5% today to 3.4% in 3 years time.
• Analysts expect earnings to reach CN¥531.2 million (and earnings per share of CN¥1.19) by about July 2028, up from CN¥158.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥800.0 million in earnings, and the most bearish expecting CN¥-161.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 199.3x on those 2028 earnings, down from 317.9x today. This future PE is greater than the current PE for the US IT industry at 27.6x.
• Analysts expect the number of shares outstanding to grow by 5.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.12%, as per the Simply Wall St company report.

GDS Holdings Future Earnings Per Share Growth

Risks

• GDS Holdings' success is heavily reliant on the demand for AI inferencing in Tier 1 markets. Any delay in chip availability could hinder future customer deployments, impacting revenue growth.
  
• The company's strategy includes waiting and seeing for future deployments, which indicates uncertainty in future market conditions and could limit immediate revenue opportunities and result in missed growth.
  
• Deconsolidation of DayOne and its reclassification as an equity investee reduces the contribution to GDS's financials from DayOne's quickly growing demand, potentially affecting net income visibility.
  
• Current financial projections do not account for the balance of proceeds from future asset monetization transactions, which could lead to variability in cash flow and dependence on external factors for free cash flow stability.
  
• The high net debt to last quarter annualized adjusted EBITDA multiple, though expected to decline, remains a risk if there's an economic slowdown or increased interest rates that could impact net margins and earnings.

Valuation

• The analysts have a consensus price target of $44.161 for GDS Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $64.44, and the most bearish reporting a price target of just $28.98.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥15.7 billion, earnings will come to CN¥531.2 million, and it would be trading on a PE ratio of 199.3x, assuming you use a discount rate of 12.1%.
• Given the current share price of $35.05, the analyst price target of $44.16 is 20.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.