DigitalBridge Stock: Hold For A Retest Or A Bullish Crossover (NYSE:DBRG)

Investment Thesis

DigitalBridge Group, Inc. (NYSE:DBRG) is an infrastructure investment firm that focuses on digital infrastructure assets. Over the last year, its stock has soared more than 62% outpacing the S&P 500 by a margin of about 28.31%.

Even with this solid performance, I am bullish on this stock in the long run given its growth catalysts and its successful deconsolidation which I believe will unlock future possibilities. From a technical perspective, this stock is entering the bullish trajectory which is yet to be confirmed. Once the technicals are clear, my target price will be $34.50. However, until we get a clear entry signal, let’s remain patient.

Technical Analysis

Firstly, I would like us to evaluate the price chart. To begin with, this stock has a strong support at about $10.12 and it bounced off the support zone in May 2023. Further, its strong resistance level is at about $34.50 which happens to be my target price. However, there is a potential move that could happen before the price moves towards the target price. Looking at the price chart, this stock has the potential to go down to retest the support zone and form the shoulder and head pattern as projected below. Should this move happen, I would still be bullish unless there is a clear breakout below the $10.12 level.

I will dive deeper here to get a clear direction for this price movement. I will use technical indicators in doing further technical analysis. To begin with, the stock is trading above the 50-day and 100-day moving averages an indication that the bullish momentum in the short and medium terms has been confirmed. Interestingly, it is approaching the 200-day moving average where a movement above the 200-day MA would be a confirmation of the long-term bullish trend.

Looking at the oscillators, the RSI is at 53.9 implying that this stock is neither overbought nor oversold. In addition, it is flattening a sign of neutrality. Further, the MACD is slightly below the signal line an indication of a potential downward movement which shows the possibility of my projected move to retest the support zone.

In summary, DBRG has a mixed technical outlook with a potential downward trend to retest the support zone. However, I am bullish as long as there isn’t a major breakout below the support zone. Given this analysis, I would recommend patience until the oscillators show a clear bullish sign, perhaps when the MACD crosses above the signal line. An ideal entry point that would confirm the long-term upward trajectory would be when the price crosses above the 200-day moving average.

The Deconsolidation

DigitalBridge successfully finalized the transition to a pure-play alternative asset manager committed to digital infrastructure, following the deconsolidation of Vantage SDC. With this move, I am optimistic about the company’s future possibilities, especially when I view this deal from two dimensions. The first one is a simplified business profile. Following the deconsolidation of Vantage SDC, DBRG no longer holds a controlling power over the financial interest in that facility. Consequently, this simplified the reporting structure. Further, the strategy was part of a broader move that aimed at recapitalizing DataBank which further simplified the business profile and translated to cost savings. This move allows DBRG to hold a 9.87% stake in DataBank which translates to a fair value of about $434 million. In my view, this strategic ownership will not only allow the shareholders to enjoy the benefits accruing from Databank’s performance but also diversify their portfolio. Most interestingly, DataBank is the largest edge infrastructure operator in the US, thus positioning DigitalBridge competitively in the market given the increasing demand for data centers.

The second aspect is the financial perspective. In the first place, this company received a recapitalization totaling $2.2 billion with gross cash proceeds of about $479 million. This financial benefit can be reinvested in other growth opportunities. In my opinion, this shift is very beneficial to shareholders because it implies a transition towards a less capital-intensive model which could potentially improve the company’s ROIC. To demonstrate this, the recapitalization translated to a pre-transaction net equity of $905 million for DBRG’s ownership, 2x its invested capital since its initial outlay in 2019. In my view, this is a solid return and a good thing for shareholders. Further, the strategy translated to a massive deleveraging, reducing its debt by about 93%. This massive debt reduction translates to a reduced financial risk, improved credit profile, and a high financial flexibility which will enable this company to invest in its growth opportunities.

In summary, the deconsolidation is a strategic move that not only provided immediate financial benefits but also positioned this company strategically for long-term growth possibilities. Following the simplified business structure, I expect this company to improve on efficiency translating to robust financial health in the future.

Growth Catalysts

While I am optimistic about the company’s future performance, I think it is important to mention one of the major growth catalysts that I believe will propel this stock to greater heights in the future. I am particularly impressed by this company’s fundraising efforts and the acquisition of AMP Capitals’s global infrastructure equity investment management business, rebranded as InfraBridge. These two aspects have been instrumental in driving this company’s growth and I believe they will keep driving future growth. Below is a summary of their excellent contribution to growth.

Based on this performance, I believe it is an indication of the company’s ability to leverage to capitalize on digital infrastructure and AI-driven demand to register strong financial performance as well as position itself for future opportunities in the market considering the acquisition. Given this background, I am pleased to see that the company is scaling up its investment in what appears to be a high-growth segment, especially on the AI front.

Risks

Although I am bullish on this stock, investing here carries risk just like any other investment. In my view, one of the risks of investing here revolves around deconsolidation. Although I believe this move has unlocked future possibilities, it has exposed this company to potential risk because it has narrowed its business model. By being a pure play asset manager, this company faces a major risk on its financials should there exist a downturn in its “narrow” business model.

Conclusion

In conclusion, DigitalBridge is a good company with strong growth levers and its deconsolidation has unlocked future possibilities. However, from a technical point of view, the bullish momentum has just started and there is a possibility of a retest on the support zone. As a result, I recommend patience until the technicals are clear and the bullish trajectory is confirmed by the price moving above the 200-day moving average, or the MACD moving above the signal line. Should the price move down to retest the support, a good entry point would be at the support zone at about $10.12.