Shares of Chinese data center company GDS Holdings (GDS -13.68%) fell as much as 25.1% in trading on Tuesday after the company reported third-quarter 2022 financial results. Shares rallied some in afternoon trading but were still down 14.4% at 3 p.m. ET.
Management said revenue was up 14.9% to $332.8 million in the quarter, but the net loss was $47.7 million. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were up 10.9% to $149.9 million, but that highlights the company’s debt problem.
Interest expense in the quarter was $62.4 million, nearly matching the $69.3 million gross profit. That doesn’t leave much money left for sales, marketing, R&D, or general expenses. This is partly why GDS is losing so much money, and with $4.5 billion in debt on the balance sheet and another $1.3 billion in lease financing, there’s a lot of debt to pay for.
The market is increasingly focused on profitability, especially for companies with large debt loads. That’s no different for GDS Holdings, which has grown to a scale that should be profitable.
What I worry about after this earnings report is the company’s relatively modest 20.9% gross margin, which is very low for a technology company, especially one operating in the cloud. That low margin will make it even harder to get to profitability because revenue will need to about double for GDS to be break even.
Given the headwinds in the business, rising interest rates, and competition, this is a stock I’m going to stay out of today. The market seems to be thinking the same.