Good afternoon,

Pretty savage old week on the market, ASX 200 down 4.30% and sitting currently at 5,686 points.

Volatility is certainly back with a vengeance after spending 2017 in the wilderness. The ASX 200 volatility index (XVI) is up at 18, after averaging c.12 for the past 2 years. The red line is the 12-week moving average and highlights the meaningful increase.

The question on everyone’s lips is are we at ‘peak earnings’? Is accelerating profit growth harder to achieve from here?

In my mind, expanding economies provide all entrepreneurs with adequate opportunity to grow their revenues and profits exponentially. Contracting/flat economic conditions favour those savvy entrepreneurs and business managers who might struggle relative to their performance in more favourable environments, but dominate their less-savvy counterparts.

For me, it looks like major economies are expanding, with the US leading the way – composite developed markets PMI below.

Source: Citi Research, Haver
So are we at peak earnings? I’d say it depends on what companies you own. Banks? Sure. They might be at peak earnings. Resources? It’s harder to predict. Is there more upside in healthcare, IT, agriculture, automation, gaming, AI, VR? It’s hard to argue the counterpoint.

The ASX 200 as a whole though has seen earnings growth revised down from about 8% to 6.4% currently, however the market has seemingly over-reacted, falling 1.5x PE points or 8.28% since the start of October.

Source: Factset


The next little piece of Data Centres is from our resident intern and local millionaire Jordan Travers. JT’s been sitting next to me for coming up 5 months now and we are really enjoying his enthusiasm, dedication and insight. He’s not a financial advisor or an experienced investor, but he’s learning fast and I thought it’d be useful for you guys to benefit from some of the learning he’s doing.

On the Edge
An insight from Jordan Travers

Doubt and price are inversely correlated. When the price of your stock goes down, an amateur investor’s doubt sky-rockets. As is the case with Data Exchange Network.

I can hear Luke now, “Jordan, do you actually know anything about data centres?”… I realised that I didn’t, and that probably you don’t either. After a brief berating, Jedi master sent me on a mission to investigate the landscape including the different kinds of data centres.

DXN is a particular type of data centre called an “edge” data centre.

Edge computing is a network development in which data gathered and produced by devices (think the IoT, Internet of Things) is processed closer to the devices themselves rather than transferred across long routes to be processed in a centralised data centre or cloud. Using a network of micro data centres with a small footprint, edge computing allows organisations to collect and analyse essential data in real time without overwhelming their existing infrastructure. Put simply; edge computing relocated data processing from a central server to the edge of a cloud network, closer to where the data originates. This allows the data to remain on the periphery where it can be analysed and applied in real time.

This differs from the other end of town in what’s known as Hyper-scale data centres. The goal here is to be able to continually scale the IT load of the data centre to meet the demands of the users. A hyper-scale data centre isn’t defined by its size but by its architecture and growth capabilities.

The typical customers of a hyper-scale centre are those huge infrastructure users hooked up to the cloud. The expansion of cloud computing has shown no signs of slowing. For example, Amazon, one of the world’s largest cloud service companies with bases in Australia, is still expanding at more than 40% CAGR. Other customers of cloud computing data centres include IBM, Facebook, LinkedIn and Uber.
Tech heavyweights like this are changing our world forever and have been for some time. According to market intelligence firm International Data Corporation, the amount of data being generated is doubling every two years. By 2020, the amount of data is predicted to reach 44 zettabytes annually… What?

This increase in demand is sparking data centre companies to invest big into expansion. In August, AirTrunk raised $850m to fund Melbourne and Sydney development only 18 months after a $400m raise in February ’17. Also last year, the world’s biggest operator Equinix bought local player Metronode for $1b. NextDC is investing $2.25b in building three new sites in Oz, and Digital Realty is opening two sites in Erskine Park to bring its Australian portfolio to $1b.

Unlike the hyper-scale data centre, where the concept represents a significant change in the way the underlying architecture of a data centre is designed, the micro-scale or edge data centre represents a shift in the way the facility infrastructure is delivered. However, there is no reason why the concepts that define a hyper-scale facility can’t be applied to the actual computer power, storage and networking components of a micro-scale design.

As mentioned before, edge computing is becoming an increasingly relevant solution for capitalising on the Internet of Things paradigm. Some estimates suggest that over 20 billion devices (not your smartphone or tablet, but your coffee machine and bedroom curtains) will be connected to the internet by 2020.

There are a few critical components of an edge data centre: Speed. Reliability. Scalability.
Reducing the physical distance between the data centre and the end user both minuses latency and enhances reliability. This can reduce the travel time from New York to San Francisco from 30-90 milliseconds to mere microseconds. The optimisation of location allows companies to prioritise which data gets processed where. The result being more immediate access to content for users and better usage of bandwidth by the business.

Being located on the edge of the network doesn’t make an edge data centre any less mission critical than it’s bigger, cloud-hosting competitors. Since an edge centre usually provides at least 75% of local internet content to the surrounding market, even a temporary loss of service can be devastating. Because this reliability is so important, the Uptime Institute grade centres based on these components of speed, security, etc. Anything below a tier-3 data centre should not be considered viable for edge computing. This rating is deemed to be the standard for content-heavy media providers like Netflix and Facebook as well as companies in the healthcare and financial service industries.

The Uptime Tier-Ready Award system is what makes it mission-critical that up-and-coming competitors like The Data Exchange Network attain the highest level possible, something they appear very eager to achieve and become one of only two companies with a tier-4 rating in Australia. If they can achieve it, they’d be the only genuinely modular, edge data centre with this award. Secure. Fast. Scalable.

So perhaps now you’re feeling a little more knowledgeable about what a data centre is, which type you own shares in and what the industry will look like in the not-too-distant future. If you haven’t already, check out the podcast that I recorded with Luke last month on The Data Exchange Network.


(Source: AFR, Data Center Dynamics, VCxchange)
Movers & Shakers

Appen (APX) up on an earnings upgrade (no surprises there)
Costa (CGC) up on an acquisition – we did mention it last week….

On the downside, Medibank (MPL) lost a contract with the defense department, everything else pretty much down on either market sentiment, AGM updates, earnings guidance, analyst revisions or going ex-dividend in the case of the banks. CYB down on BREXIT worries.

Have a good week,
LL