Is GDS Holdings Stock a Buy?

GDS Holdings Limited (NASDAQ:GDS) has emerged as a leading developer and operator of high-performance data centers in China and Southeast Asia. With a solid 23-year track record of service delivery, the company’s client base includes internet companies, financial institutions, telecommunications carriers, and IT services.

Over the past year, the company has engaged in several strategic collaborations to scale its operations but investors remain concerned about weak financial performance reported throughout the last year.

While GDS Holdings shares have plummeted more than 60% over the past year and 21% year-to-date, can a bounce be expected?

Is GDS Holdings Stock Profitable?

GDS Holdings experienced year-over-year top line growth in each of the four quarters of the fiscal year 2023. Its fourth-quarter net revenue rose by 6.3% from the year-ago quarter to $360.07 million and adjusted EBITDA improved 5.7% year-over-year to $159.53 million.

With that said, adjusted EBITDA margin in the same quarter declined to 44.3% from 44.6% a year ago.   

Likewise, the company’s fourth-quarter adjusted gross margin of 49.7% fell from 50.9% in the same period last year while GDS Holdings’ loss from operations stood at $413.84 million.

Moreover, the company remained unprofitable in each of the four quarters of 2023. During the final quarter of 2023, the company reported a staggering net loss of $445.73 million, worsening significantly from the year-ago value.

Will International Operations Ignite Performance?

Headquartered in Singapore, GDS International, the company’s international arm currently holds a portfolio of 330 megawatts of data center capacity in service and under construction, and a further 340 megawatts held for future development across strategic locations including, Hong Kong, Singapore, Malaysia, and Indonesia.

According to media releases before GDS Holdings’ Q4 earnings release in March, management was discussing with private equity investors to sell a stake in its international operations due to funding constraints.   

During the fourth quarter earnings call, William Huang, GDS Holdings’ Chairman and CEO, highlighted the company’s strategic objective to capture the global data center market by creating top-notch data center platforms. Huang further emphasized the company’s growth opportunities in these markets.

Regardless, investors do not appear to have taken the company’s decision not to sell the international operations positively, as evident from the stock’s decline following the announcement of its equity raise on March 26.

So, Is GDS Holdings Stock a Buy?

Analysts remain bullish on GDS Holdings with the average price target of $15.86 per share indicating upside potential of 127%.

Moreover, 7 out of 11 analysts recommend buying GDS shares. The remaining 4 rate the stock as a Hold. Notably, GDS Holdings has no Sell ratings from the analyst community.

The stock trades at 0.85 times forward sales, more than 70% lower than its sector median. Compared to the 5-year average price-to-sales (P/S), it is 90% discounted.

Given that Wall Street expects the company’s revenue to grow by about 13.5% this year to 1.57 billion and 14.8% next year to $1.8 billion, the stock looks very cheap at this current valuation.

Despite an underwhelming fourth-quarter performance, GDS Holdings’ long-term prospects may well be brighter than shareholders are giving it credit for due to its renewed focus on operations outside of China. Another driver that may support better fundamentals down the line is the demand for compute from artificial intelligence demand.

While the demand for AI in China hasn’t quite picked up yet, as CEO Huang highlighted during the fourth-quarter earnings call, the company is well-equipped to benefit when it does, thanks to its 1.5 gigawatts of data center capacity in service and under construction.   

GDS has the hallmarks of being a company that is out of favor with shareholders at this time but which has the potential to outperform over the medium to long-term when the sentiment pendulum shifts more positively in its favor away from the present negative bias.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.