Short Selling Opportunity？Declining Profit Margins, Soaring Stock Prices

Going back to 2016, the company's largest customer was IBM, accounting for 7.8% of its revenue; last year, the largest customer was Amazon, representing 10% of its revenue. As a data center Real Estate Investment Trust (REIT), there are primarily two types of customers—the first type being the co-location data centers of small to medium-sized enterprises. According to the definition in its 10-K report, this corresponds to contracts of 2 to 5 years, with no more than 75 cabinets, and a power demand of 0-1 megawatts. Due to the smaller scale of these customers, DLR has stronger bargaining power, and thus higher profitability.

The second type of customers includes hyper-scale companies such as Azure, AWS, and Google Cloud Platform (GCP), with whom DLR has minimal bargaining power. Since 2016, as small to medium-sized enterprises have increasingly migrated to cloud services, DLR's EBIT margins and occupancy rates have been declining, suggesting that DLR's profitability may further decrease in the future. Ironically, the advent of the AI era appears to be DLR's biggest enemy!

The stock price increase is based on optimism towards AI and data centers, an optimism not supported by fundamental analysis, thus providing an excellent entry point for establishing a short position.