Jim Chanos: A Short Thesis on Data Centers

SPEAKER_1 (0:00)

This episode is brought to you by Tegas, the modern research platform for leading investors and the provider of Canalist.

Tired of calculating fully diluted shares outstanding? Access every publicly reported data point and industry specific KPI through their database of over 4,000 drivable global models, hand built by a team of sector focused analysts, 35 plus industry comp sheets and Excel add-ins that let you use their industry leading data in your own spreadsheets. Tegas' models automatically update each quarter, including hard to calculate KPIs like stock-based comp and organic growth rates, empowering investors to bypass the friction of sourcing, building and updating models. Make efficiency your competitive advantage and take back your time today. As a listener, you can trial Canalist by Tegas for free by visiting tegas.co.slashpatrick.

SPEAKER_2 (0:50)

This is Business Breakdowns.

Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages and what makes it tick.

We believe every business has lessons and secrets that investors and operators can learn from. And we are here to bring them to you. To find more episodes of Breakdowns, check out joincolossus.com. All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers or affiliates may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

Zack Fuss (1:39)

I am Compound248, back to host another episode of Business Breakdowns. My most recent podcasts have focused on digital infrastructure. And today we continue with that theme, but with a twist.

Our guest is Wall Street legend, Jim Chanos, famed for bringing a skeptical eye to a credulous world. Together, we walked through his short thesis on the US data center REITs, his bear case for commercial real estate and some broader wisdom on how management can thoughtfully respond to short sellers. Let's get started. Investing in the real assets that underpin our digital world has never been easier. We are pleased to bring you this podcast in partnership with Round Hill Investments, the advisor to the Round Hill IO digital infrastructure ETF, BYTE, which trades on the New York Stock Exchange under the ticker symbol BYTE. The fund tracks the BYTE index, which measures the performance of 40 leading global digital infrastructure businesses, such as mobile towers, fiber and fixed line connectivity and communications infrastructure. Industries that grow with society's insatiable appetite for more data, faster everywhere. For perspectives and more information, please visit roundhillinvestments.com/etf/byte. Read carefully, investing involves risk, including possible loss of principle. Investors should consider the investment objectives, risks, charges and expenses carefully before investing in BYTE.

Distributor Foresight Fund Services.

Jim, thank you for most listeners. Your reputation as the world's foremost short seller will have preceded you. So I'm grateful for you joining us. We'll hopefully have a little bit of a wide ranging discussion on markets and short selling, but I'd love to begin with a timely call you made public last summer on shorting data centers.

And with rising rates and the crunch in tech and venture slowdown, you're already partway home on that thesis as it's beginning to play out. And so I'd love to just sort of dive into what you saw, what you see now and help the average person understand what your short selling process looks like. And maybe we could just start with what is a data center and why does it matter? Why is it relevant to the average person?

Jim Chanos (4:03)

There's really three ways for an enterprise to maintain its data.

One, you do it yourself on site and you have your own IT department. They keep the servers running, maintain the software and the cybersecurity.

Second, and that which the legacy data centers that were short, epitomizes the co-location data centers, whereby you keep your server at a third party location. The third party maintains the servers, keeps the air conditioning on, does whatever routine maintenance is needed to do, and provides the network connections. And those are the so-called legacy data centers.

That is the focus of our big short. And then the third way, which is the way that is garnering the most market share now, is the so-called cloud providers. These would be what we call and others call the hyperscalers. Amazon AWS, Microsoft Azure, Google Cloud, et cetera. Oracle has one. And this is just simply you keeping your data on their servers and they maintain them, try to sell you add-on services on top of just a hosting fee. That's the three ways in which data is kept for enterprises.