Money Talks: This expert reckons there’s only one small cap ‘data centre’ worth backing
Money Talks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to see what’s hot, their top picks and what they’re looking out for. Today, we hear from Hani Iskander, a partner at specialist technology investment bank Cube Capital.
Data storage is the sector to be in, according to Iskander.
“We live in a world where nothing is deleted,” he told Stockhead. “People keep storing data, from a photo of every meal one has uploaded to Instagram to people’s entire lifetime of financial history stored by banks.
“I think there will never be too many data centres on planet Earth.”
Iskander says data centres are the “bricks and mortar” business of technology.
“The sector has been growing at a compound annual 18 per cent over the last decade,” he noted.
According to Iskander, data centre companies in Australia will always have business because most government departments and banks have in place a requirement for “data sovereignty” – which means the data has to be stored on Aussie soil.
Software giants like Google and Microsoft are also often tenants of Australian data centres.
One of Iskander’s small cap picks is Data Exchange Network (ASX:DXN), which has a market cap of about $11.7m at its current share price of 6c.
“DXN builds small modular facilities that are faster to build and more suited to regional clients,” Iskander said.
“Basically, shipping containers that have hundreds of computer servers. Plug-and-play data centres. Microsoft has been doing this for a while with their Azure division.
“Data Exchange Network is also backed by the Packer-linked investment vehicle Ellerston Capital and former JB Hi-Fi CEO Terry Smart.”
Iskander’s advice to would-be investors is: don’t invest in IPOs when it seems that the listing company has not raised venture capital long before the IPO.
“The ASX should not be used as a VC platform for start-ups,” he said.
“There is a reason why some tech companies fail to raise venture capital from VCs. It usually means the VCs cannot see value in them.”
Iskander says to invest in tech companies that are in bread-and-butter businesses — like data centres.
“Ones that do fundamental things for their customers, be it B2C or B2B,” he said.
“It’s what Warren Buffett does. If you don’t understand the business model, it’s probable that the founders themselves don’t have it right either.”
The best strategy is to invest in “baskets of stocks”, Iskander says.
“This is critical. Given that the most experienced people (eg fund managers, equity capital and venture capital partners) don’t have crystal balls to enable them to identify ‘the next Google’, why would anyone use blind-faith to back just one company?
“It’s illogical to back companies one at a time.”
Iskander says companies with little or no revenue are “very high-risk bets”.
“Almost all founders underestimate the real capital needs to reach break-even, and almost all of them never raise enough in an IPO to get them to break-even,” he said.
According to Iskander, the “art of smart investing” is to not lose your capital way ahead of seeking to get a 50 per cent or 200 per cent gain.
“Think Splitit (ASX:SPT). It’s not a good example, but is a bet.”
Before moving to investment banking, Hani Iskander was a serial entrepreneur having started and built seven software companies and holding several C-level roles with global technology companies. Over the years, he has held a regional management role with SAP and has been vice president of Asia Pacific and Japan with two NASDAQ-listed technology companies. He founded Accelerator Capital in 2000 and managed M&A transactions for 15 years.