By Iron Mountain (NYSE: IRM) stock price has gone parabolic this year, making it one of the top-performing companies in the S&P 500 index. It has risen in the last five consecutive months and is sitting at its highest point on record.
Excluding dividends, IRM has soared by almost 2,000% since going public in early 2000s, beating the S&P 500 index, which has soared by 866% in the same period. Its performance slightly trails that of the Nasdaq 100 index, which has jumped by 2,200% in the same period.
Iron Mountain’s performance has made it a high valuable – and expensive – companies in the industry with a market cap of over $30 billion.
Data center demand
Iron Mountain’s stock performance is mostly because of its data center business, which has been growing exponentially in the past few years.
The data center sector is growing because of generative AI and cloud computing trends, which are continuing. A good proxy for the data center industry is Nvidia, a technology company whose revenue is growing by triple digits.
Analysts believe that the industry has more growth left. Just last week, we wrote that Apple and Nvidia were considering investing in OpenAi, valuing it at over $100 billion. Now, the company is said to be raising cash at a $150 billion valuation.
Iron Mountain is an integral part of the AI industry because it is one of the biggest data center companies globally. It offers its centers to companies like Amazon, Microsoft, Google, IBM, and Salesforce.
In addition to these services, the company is involved in the Records and Information Management, where it offers solutions like records management, data management, secure shredding, and global digital solutions.
Iron Mountain also provides solutions like fine art handling and transportation and secure logistics solutions. As a result, according to its website, it serves over 80% of all Fortune 2000 companies.
Valuation concerns remain
Iron Mountain has become one of the biggest players in the Real Estate Investment Trust (REIT) business.
This growth is mostly because of its data center business, which investors believe has more room to grow in the future.
However, the main concern among most investors is that it is highly overvalued considering that its revenue and profitability growth has not been all that strong.
Iron Mountain made over $4.2 billion in annual revenue in 2019 and $5.48 billion in the last financial year, a 28% increase. It is also a low-margin business. Of the $5.48 billion it made in 2023, the company had a net profit of $184 million.
While the AI industry is growing, analysts don’t expect substantial growth in the coming years. The average revenue guidance for this year is $6.14 billion followed by $6.7 billion in the following year. Its guidance for the year in the last financial results was $6 billion and $6.15 billion.
Double-digit growth for a REIT is a good thing but analysts believe that it does not justify Iron Mountain’s valuation. Data by SeekingAlpha shows that Iron Mountain trades at a hefty valuation multiple compared to the market and its peers.
It has a price-to-earnings ratio of 62 and a forward multiple of 60, higher than the sector medians of 36 and 38, respectively.
Additional data shows that it has an EV to EBITDA of 25 and is trading at a price to free cash flow multiple of 28.
For a REIT, the best multiples are the price-to-funds from operations (P/FFO). It has a trailing and forward P/FFO multiples of 36 and 35, higher than the sector medians.
In contrast, Digital Realty Trust, another large player in the industry has multiples of 24 and 23 while DigitalBridge has 22 and 25, respectively.
To be clear: history suggests that highly valued companies tend to outperform cheap bargains. Also, Iron Mountain has been overvalued for a long time because of the ongoing boom in data consuming industries like cloud computing, AI, and machine learning.
Iron Mountain stock is also overbought
The weekly chart shows that the Iron Mountain share price has been in a strong bull run for a long time. It has risen in the last 13 of 15 weeks, making it one of the best performing companies in Wall Street.
As a result, the stock is about 36% above the 50-week moving average, meaning that it is not a bargain. It is also highly overbought, with the Relative Strength Index (RSI) rising to the overbought level of 81 while the Stochastic Oscillator being near 100.
Therefore, the IRM stock price will likely continue rising as long as the AI investments are rising. In the future, however, a pullback cannot be ruled out as some of the investors start to take profits. If this happens, the stock will likely retreat and retest the key support at $100.
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