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BofA Securities has adjusted its outlook for VNET Group Inc (NASDAQ: VNET), increasing the price target to $3.30 from the previous $2.80 while maintaining a Buy rating on the stock.
The revision follows VNET's reported second-quarter earnings on August 28, which showed a year-over-year revenue increase of 9% to Rmb1.99 billion, exceeding consensus and BofA estimates by 3%. Adjusted EBITDA also rose by 7% year-over-year to Rmb574 million, surpassing expectations by 5% and 1%, respectively.
The earnings call revealed several key points contributing to the positive assessment. The demand for wholesale Internet Data Center (IDC) is particularly strong, especially from the artificial intelligence sector.
Additionally, management has upped its capital expenditure forecast for the fiscal year 2024 to Rmb5-5.5 billion from the previous Rmb3.7-4.2 billion. This increase is attributed to a robust pipeline of new orders and more projects currently under construction.
VNET Group anticipates delivering between 100-140MW of wholesale capacity in the second half of 2024 and projects 110-150MW for the first half of 2025. In light of the accelerated ramp-up in wholesale capacity, BofA Securities has raised its adjusted EBITDA estimates for fiscal years 2024-2026 by 2-5%. The price objective has been rolled over to the new target based on a 9x 12-month forward EV/EBITDA multiple, which remains unchanged.
The firm reiterated its Buy rating on VNET shares, citing the company's improved downstream demand and order visibility, particularly from the AI industry. The outlook suggests a favorable position for VNET in the market, as it continues to expand its capacity and capitalize on the growing demand for data center services.
In other recent news, VNET Group has reported a positive second quarter for 2024, with net revenues witnessing a 9.4% year-over-year increase to RMB 1.99 billion and adjusted EBITDA growing by 7.3% to RMB 574 million.
The company's wholesale business revenues soared by 81% year-over-year to RMB 402 million, reflecting significant growth. VNET Group has also highlighted plans for strategic expansion, particularly in AI computing power, and aims to expand wholesale capacity to approximately 1 gigawatt over the next 12 months.
The company has secured significant orders for the wholesale data center in the Greater Beijing Area, totaling 235 megawatts. They have also raised their full-year CapEx guidance to between RMB 5 billion and RMB 5.5 billion. For 2024, VNET Group forecasts total net revenues to range from RMB 7.8 billion to RMB 8 billion, with adjusted EBITDA expected to fall between RMB 2.22 billion and RMB 2.28 billion.
InvestingPro Insights
As VNET Group Inc (NASDAQ: VNET) garners a positive outlook from BofA Securities, InvestingPro data provides additional context for investors considering the stock. With a market capitalization of $533.93 million and a Price / Book multiple of 0.75 as of Q2 2024, VNET is trading at a valuation that may attract investors looking for potentially undervalued companies in the IT Services industry. Despite not being profitable over the last twelve months, the company has experienced a significant return over the past week, with a 21.65% price total return, and a strong return over the last three months at 29.67%. This momentum is reflected in the stock's high price volatility, a characteristic that traders may find appealing.
InvestingPro Tips highlight the company's significant debt burden and the fact that it's quickly burning through cash, which are crucial considerations for risk assessment. However, analysts predict that the company will be profitable this year, and VNET is recognized as a prominent player in the IT Services industry. For those looking for more in-depth analysis, there are over 15 additional InvestingPro Tips available, providing a comprehensive view of VNET's financial health and market position.
These insights, combined with the recent earnings report and BofA's raised price target, suggest that VNET is a company with both opportunities and challenges ahead. Investors may find the additional data and tips from InvestingPro valuable as they assess the potential risks and rewards associated with VNET shares.
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