Is GDS Holdings Ltd (GDS) Set to Underperform? Analyzing the Factors Limiting Growth
Long-established in the Software industry, GDS Holdings Ltd (NASDAQ:GDS) has enjoyed a stellar reputation. It has recently witnessed a daily gain of 7.23%, juxtaposed with a three-month change of -8.89%. However, fresh insights from the GuruFocus Score Rating hint at potential headwinds. Notably, its diminished rankings in financial strength, growth, and valuation suggest that the company might not live up to its historical performance. Join us as we dive deep into these pivotal metrics to unravel the evolving narrative of GDS Holdings Ltd.
Understanding the GF Score
The GF Score is a stock performance ranking system developed by GuruFocus using five aspects of valuation, which has been found to be closely correlated to the long-term performances of stocks by backtesting from 2006 to 2021. The stocks with a higher GF Score generally generate higher returns than those with a lower GF Score. Therefore, when picking stocks, investors should invest in companies with high GF Scores. The GF Score ranges from 0 to 100, with 100 as the highest rank.
Financial strength rank: 4/10
Profitability rank: 5/10
Growth rank: 9/10
GF Value rank: 2/10
Momentum rank: 1/10
Based on the above method, GuruFocus assigned GDS Holdings Ltd the GF Score of 64 out of 100, which signals poor future outperformance potential.
Company Snapshot: GDS Holdings Ltd
GDS Holdings Ltd, with a market cap of $2.08 billion, started as an IT service provider in 2001 and transitioned to the data center business in 2010. The company develops and operates data centers in China and also builds, operates, and transfers data centers for other clients. It primarily targets hyperscale cloud service customers who take large areas of its data centers or even whole data centers under long-term contracts. GDS Holdings Ltd has aggressively raised capital over the past four years for expansion. Its data centers are located predominantly in and around the Tier 1 cities in China, and it has also started an expansion plan into Southeast Asia. GDS listed on the NASDAQ in 2016 and completed a secondary listing in Hong Kong in 2020.
Financial Strength Analysis
GDS Holdings Ltd's financial strength indicators present some concerning insights about the company's balance sheet health. The company's interest coverage ratio of 0.41 positions it worse than 97.85% of 1583 companies in the Software industry. This ratio highlights potential challenges the company might face when handling its interest expenses on outstanding debt. The company's Altman Z-Score is just 0.27, which is below the distress zone of 1.81. This suggests that the company may face financial distress over the next few years. Additionally, the company's low cash-to-debt ratio at 0.17 indicates a struggle in handling existing debt levels.
Profitability Analysis
GDS Holdings Ltd's low Profitability rank can also raise warning signals. Additionally, GDS Holdings Ltd's Gross Margin has also declined over the past five years, as evidenced by the data: 2018: 22.29; 2019: 25.29; 2020: 27.02; 2021: 22.76; 2022: 20.76. This trend underscores the company's struggles to convert its revenue into profits.
Conclusion
Given the company's financial strength, profitability, and growth metrics, the GuruFocus Score Rating highlights the firm's unparalleled position for potential underperformance. While GDS Holdings Ltd has a commendable history in the Software industry, its current financial indicators suggest that it may struggle to maintain its performance in the future. Therefore, investors should exercise caution when considering this stock.
GuruFocus Premium members can find more companies with strong GF Scores using the following screener link: GF Score Screen
This article first appeared on GuruFocus.
