On Wednesday, Citi initiated coverage on shares of VNET Group Inc (NASDAQ: VNET), a leading data center services provider, assigning a Buy rating and establishing a price target of $4.00. The firm has resumed its evaluation of VNET with a positive outlook after a period of suspended rating, passing the coverage to Louis Tsang.
VNET recently reported its second-quarter results for 2024, showing a revenue increase of 9% year-over-year, which was 3% higher than Bloomberg estimates (BBGe). This growth was primarily fueled by an 81% year-over-year surge in wholesale business revenue and a 13 percentage point increase in utilization rate. The company's EBITDA for the quarter grew by 7% year-over-year to RMB 589 million, aligning with expectations, while net profit hit RMB 64 million.
The company has also made significant strides in expanding its capacity, securing a 235MW order in Ulanqab and planning an additional 1.2GW capacity in the same region to meet the growing demand for AI training. Citi forecasts a yearly increase of 100-150MW in service capacity and 100-120MW in utilized capacity from 2024 to 2026.
Citi anticipates that VNET will achieve a 22% compound annual growth rate (CAGR) in EBITDA from fiscal year 2023 to 2026. This projection is based on the company's accelerated capacity expansion, move-in rates, and higher utilization, all driven by a recovery in domestic demand. Currently, VNET's stock is trading at approximately 6 times its forecasted FY25 enterprise value to EBITDA (EV/EBITDA), which is a more than 40% discount compared to the average of its peers, suggesting a value opportunity according to the firm.
In other recent news, VNET Group Inc. has reported a positive second quarter with a year-over-year revenue increase of 9% to Rmb1.99 billion, surpassing both consensus and BofA estimates. The company's adjusted EBITDA also rose by 7% year-over-year to Rmb574 million, exceeding expectations.
BofA Securities has adjusted its outlook for VNET Group, increasing the price target to $3.30 from the previous $2.80 while maintaining a Buy rating on the stock. This revision follows the strong demand for VNET's wholesale Internet Data Center (IDC), particularly from the artificial intelligence sector, and the company's increased capital expenditure forecast for the fiscal year 2024. T
he company anticipates delivering between 100-140MW of wholesale capacity in the second half of 2024 and projects 110-150MW for the first half of 2025. VNET Group has also reported significant growth in its wholesale business revenues, which soared by 81% year-over-year to RMB 402 million.
Furthermore, the company has secured substantial orders for the wholesale data center in the Greater Beijing Area, totaling 235 megawatts, and raised their full-year CapEx guidance to between RMB 5 billion and RMB 5.5 billion.
InvestingPro Insights
With VNET Group Inc (NASDAQ: VNET) gaining attention from Citi's recent Buy rating and a positive earnings report, investors may find additional insights from InvestingPro valuable. The company's Price / Book multiple stands at a low 0.86, indicating that the stock may be undervalued compared to its book value. This aligns with Citi's perspective of a value opportunity as the stock trades at a discount compared to its peers.
InvestingPro data also reflects a significant increase in VNET's stock price over various time frames, with a one-week total return of 14.83% and a six-month total return of 77.12%. These figures suggest a positive short-term momentum for the stock, which could be appealing to momentum investors. It is important to note, however, that VNET operates with a significant debt burden and has been quickly burning through cash, which are factors that could impact long-term sustainability.
For those considering an investment in VNET, InvestingPro offers numerous additional tips, including insights on the company's market movements, valuation, and profitability predictions for the current year. For a more comprehensive analysis, interested parties can find a total of 17 InvestingPro Tips for VNET, providing a deeper dive into the company's financial health and market position.
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