DigitalBridge Group, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

DigitalBridge Group, Inc. is a global digital infrastructure investment manager, focusing on data centers, cell towers, fiber networks, and small cells, and operates a diversified portfolio across asset types and geographies.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

DigitalBridge is a global digital infrastructure investment manager, not an operating company. This is an important distinction that sets it apart from many other companies in the tech sector. The company’s business model centers around acquiring, managing, and developing digital infrastructure assets, rather than producing software, hardware, or services that run on top of that infrastructure. This model gives DigitalBridge a unique economic position within the broader digital economy.

Business Overview:

Revenue Distribution: DigitalBridge generates its revenue primarily from asset management fees, incentive fees, and other income related to investments. A significant portion of their income comes from managing assets for third-party investors, including sovereign wealth funds, pension funds, and endowments. While they also have their own balance sheet that they use to invest and operate. The performance of their funds, therefore, affects revenue. The company reports its results in two segments: Investment Management and Operating. The Investment Management segment manages capital for third-party investors, while the Operating segment includes the assets and operations in which DigitalBridge has a stake. In the Q3 2023 call, the company states that Investment Management is performing more strongly than Operating and that they are shifting their focus to the higher-margin Investment Management segment. The Investment Management segment accounted for 87.8% of revenue in the most recent quarter.
Industry Trends: The digital infrastructure sector is undergoing significant expansion, driven by increased global demand for data storage and processing. Trends such as cloud computing, AI, and the expansion of 5G networks continue to fuel this demand, making the long-term outlook for the sector promising, especially for companies like DigitalBridge that own important real estate in the space, like fiber networks, towers and data centers. However, this sector is very competitive. As noted earlier by management, rising interest rates will increase the cost of capital, affecting their ability to expand and make acquisitions. Management has been increasing its revenue in fee-generating, high-margin Investment Management, which is a move in the right direction.
Margins: Given DigitalBridge’s business model, margins are a key determinant of value creation. The Investment Management business is more capital-light than the operating business. Therefore, the Investment Management segment has better margins. Management has emphasized that they’re pushing for higher revenue and higher margins in their fund and investment management segment, which will be their focus moving forward. They are targeting fee-related revenue growth at a CAGR of 10-15%. The company has stated that they are looking to transition from being a balance-sheet investor into a fee-earning asset manager. Their goal is to increase the assets under management, which generate recurring fees for the company.
Competitive Landscape: The digital infrastructure sector is competitive. While there are fewer competitors that are directly in the investment management business, they do compete with the overall asset management business. DigitalBridge often competes with other private equity firms, institutional investors, and traditional asset managers. Also, companies that directly own and operate data centers, towers and fiber compete for the same investors in their funds. The level of competition makes it hard for most companies to maintain consistent excess returns on invested capital, due to aggressive bidding for new assets.
What Makes DigitalBridge Different? The company has a unique focus on digital infrastructure, including data centers, towers, and fiber networks. The company’s management has extensive operational experience in those fields. The company’s business model of having a dedicated investment management platform is different from some pure operating plays that rely purely on revenue-generating facilities. Also, as a separate entity, they try to have the best practices of asset management and operations.
Other Relevant Points: The company is focusing on de-leveraging and reducing debt. They are doing this by selling off a few assets and reducing leverage. As a capital deployment company, their investment decisions affect value creation and they are being more selective in their investments. The company is focused on scaling their core Investment Management business and are committed to continuing building an asset management platform.

Financials:

Revenue: In the most recent Q3 2024 report, the company reported revenue from their continuing operations at $205 million, compared to $300 million in 2023. The reduction is because of their focus on investment management rather than direct investments. Recurring management fees and other income are rising while operating revenues are declining. This is because their focus is to increase fees over time, even if revenue from direct investment declines.
Profitability: The company’s profitability remains weak, with large losses. Their net losses stood at 39.1 million, which is an improvement from 199.5 in 2023. The company has a large cost structure. A large chunk of their costs comes from employee compensation, operating expenses, and interest expense. They continue to be in the red after paying these large costs.
Balance Sheet: The company’s balance sheet has substantial debt. Total assets were 13.7 billion, with total liabilities at 7.6 billion. The company has taken various steps to improve their debt profile in their operating segment, paying down some of their debt by liquidating some assets. This should ultimately help free cash flow for equity investors.
Cash Flow: The company’s operating cash flow has been volatile, due to the changes in their business. They are showing net positive cash flow, though there are still lots of volatility across quarters.
Share Repurchases/Dividends: The company has not indicated any plans for dividend payouts, and are using the cash they have to repurchase shares and pay down their debt.

In the latest earnings call, management reiterated their plan to focus on recurring, high-margin fees through their investment management segment, while simultaneously de-leveraging their balance sheet by selling off non-core assets from their operating business.

Moat: 2/5 DigitalBridge’s moat is relatively narrow, it’s not wide because there is a considerable level of competition, as outlined earlier, and it is very hard for companies to keep that competition at bay. The company’s moat, or competitive advantage, primarily comes from the following:

Specialized Expertise: DigitalBridge has a specialized skill set in managing digital infrastructure assets. The leadership team has a long history of experience in this space, which may make them more attractive than other players in the investment world. But the experience of this management team does not preclude new entrants from coming in and taking a portion of the fees.
Established Relationships: DigitalBridge has connections to large institutional investors and private equity investors. These connections may provide the company with recurring management fee income in the future.
Economies of Scale: Over time, as the assets under management continue to grow, DigitalBridge’s operating efficiencies will improve. This can bring in new business with less additional capital cost. This is because most of the costs are fixed, such as employees and corporate infrastructure.

However, these moats are not terribly strong. Other firms can easily replicate a management team of similar size and skill. As of now, brand recognition for asset managers is minimal, since investors don’t care as much about who they’re investing with, as long as the performance of the funds are high. The relationships are also not necessarily exclusive to this company. The company’s market has high competition for new projects and assets. These factors make the competitive position of the firm tenuous and not that well established. They do not show the sustainable, above-average returns that make a company deserving of a high moat rating.

Legitimate Risks to the Moat and Business Resilience: DigitalBridge faces significant risks. These include the following:

Rising Interest Rates: As mentioned earlier, this can increase the costs of borrowing for new investments and acquisitions. Also, they may face higher hurdle rates, reducing profitability.
Increased Competition: This may lead to less profitable acquisitions and management fees for the company.
Dependence on Key Personnel: The success of DigitalBridge is heavily reliant on the expertise and relationships of a few key leaders. The departure of these executives would have an adverse impact on the business.
Inability to Find New Opportunities: If the company is unable to find and secure new, attractive investment opportunities, their growth would be hampered. Also, existing projects may underperform.

These risks are formidable, but the company is not without resilience. Their focus on recurring, high-margin fees and an experienced management team can help the company to survive downturns in the sector. Also, the structural demand for data storage and processing makes a long-term positive trend for this market. This underlying secular trend could help companies like DigitalBridge continue to grow.

Understandability: 3 / 5

The company is not overly complex, but also not that easy to understand. Some parts are more nuanced than others:

Investment Management is a Fairly Common Concept: The idea that they invest on the behalf of other investors is easy to grasp. Their fee structure is also straightforward.
The Digital Infrastructure Space is Complex: It’s much harder to grasp what exactly is the business of data centers and fiber optic lines, and why that is different from other parts of the tech sector. Their business itself is not inherently complicated, but their focus on a particular, more technical, sector makes it harder to understand for the average investor.
Accounting Complexities: The accounting used to delineate the performance of their operating and investment management segments can be hard to understand. Furthermore, the complexity of valuation of non-operating assets and associated accounting adjustments is tricky.

Balance Sheet Health: 3 / 5 The balance sheet is in a reasonable position, but carries a few risks:

Large Debt Burden: As mentioned, their debt levels are quite substantial. But, given the recent management guidance, they are making serious effort to reduce their debt.
Intangible Assets: They have substantial amounts of intangible assets on their books, such as goodwill. These are hard to value and can present accounting issues in the future.
Adequate Cash Balance: Their cash balance is adequate given their ongoing operations, though their cash flow from operations is not very robust, and a larger proportion of that comes from their higher margin Investment Management segment. This means that their cash profile has a bit of weakness in it.