From mushroom king to data center dynamo

People are talking about Iron Mountain (IRM) these days thanks to its place in the data center race. And the fact that its stock has dipped this month makes it even more intriguing to many investors.

So is now a good time to buy in?

Here at Wide Moat Research, we work hard to identify quality companies at attractive price points. And there’s no doubt in our minds that Iron Mountain fulfills the first part of that description.

It’s just the second part that needs to be evaluated.

Iron Mountain can trace its roots back to 1936, when Herman Knaust bought a depleted iron-ore mine in upstate New York. The 100-acre property looked ideal to grow mushrooms, and so it was. The venture was actually such a success story that Knaust became known as the Mushroom King.

And when that business eventually dried up, he turned the property into a literal fortress instead.

You see, after World War II, Knaust helped relocate Jewish immigrants whose identities had been lost or destroyed. The experience taught him how valuable physical documentation is, and then the Cold War made everyone else realize it, too.

So when he turned his mine into a bomb-safe shelter for corporate records in 1951, business came rolling right in. Companies and government agencies alike took Knaust up on his promise to keep their paper records and other valuables safe.

That gave him more than enough cash to expand Iron Mountain further by offering file management and transportation services… to open a second underground facility in 1975… and then an aboveground property in 1978.

Next came its center to protect backup computer data in 1980. And well before the decade was over, Iron Mountain became the first records-management company to track inventory with UPC barcodes.

Those were all very big deals back then. Yet its innovative streak would only continue from there.

Iron Mountain went public in 1996, the same year it passed the $100 million mark in annual revenue. And while investors were happy with the company, they still largely saw it as just a document-storage company.

A profitable one with a growing global presence as the century came to a close, yes. But a storage company nonetheless.

Little did they know that Iron Mountain was far from finished in its evolutionary efforts.

I began covering the stock in June 2012, after its board announced it was looking into becoming a real estate investment trust, or REIT. It would take another year and a half before it got all the necessary paperwork filed and approvals signed. However, I knew it fit the bill right away.

After all, Iron Mountain owned or leased almost 1,000 facilities at the time – including records centers, data-protection vaults, secure shredding facilities, underground repositories, and fulfilment centers – that amounted to about 64 million square feet. And it was collecting recurring “rent” on most of that space.

As such, income investors would get up to $1.5 billion in accumulated earnings and profits by way of dividends after Iron Mountain converted to a REIT. That’s why they sent the stock up 10.3% in a single day on the initial news.

They weren’t disappointed either. As so often happens when a publicly traded company becomes a REIT, Iron Mountain’s investor base expanded, its capital allocation became more disciplined, and its platform became more tax efficient.

Moreover, even while it was navigating getting official approval to become a REIT, Iron Mountain began investing in data centers. This was in 2013 – nearly a decade before the artificial intelligence (AI) boom began and data centers became the smoking hot trades they are today.

But, as usual, management knew how to both read the signs… and grow from them.

By the time the 2010s came to a close, Iron Mountain had developed about 120 megawatts (MW) of leasable data-center capacity. And it had another 15 under construction.

It still had plenty of hard-copy clients paying it very reliable rent, mind you. In fact, annual customer turnover sat at just about 2%, with over half the boxes it held remaining there for 15 years or longer.

That makes sense when you really think about it: how expensive, time-consuming, and even dangerous moving millions of sensitive corporate or governmental records could be. Those are the kinds of difficulties even a global pandemic can’t alter.

Of course, in May 2020, that’s not how the market viewed Iron Mountain or just about any other REIT. If a company owned or managed property, it was relegated to Wall Street’s bargain bin.

So when I published an article on Seeking Alpha titled, “Iron Mountain: a trusted brand that now yields 10.5%” on May 5, I’m sure people thought I was crazy.

At the time, IRM traded at about $23.60, yielded 10.48%, and came in at a mere 7.7x of adjusted funds from operations (AFFO). That was about 40% below its normal value.

Moreover, the company had a “junk bond” rating of BB- and elevated leverage – all of which I acknowledged.

It’s just that I also had to acknowledge how analysts still expected it to bring in AFFO of $3.22 per share for the year with a $2.47 annual dividend. That represented a payout ratio of around 77%, which was a whole lot more sustainable than Wall Street was giving it credit for.

No dividend is ever guaranteed, of course, but I thought Iron Mountain could keep its commitments… even in the face of the global meltdown we were in. And, sure enough, it did, while also continuing to reduce its payout ratio.

Today, it sits around 60% of AFFO per share, which is a very sustainable place to be.

Iron Mountain now has more than 240,000 customers across 61 countries, including 95% of the Fortune 1,000 list.

It also operates 31 data centers with approximately 507 MW of capacity. And it controls enough developable cyber space to grow that platform by nearly three times its current size.

That will obviously take time to build out. But Iron Mountain already expects to add another 175 MW of capacity over the next 18 months and a total of 400 in the next 24. Because, why not?

It has the smarts, connections, and money to make it happen. And the demand is definitely there as well.

In Q1-26, Iron Mountain grew its data center revenue by 47% after signing 22 MW of new leases. Then it signed another 10 through a single lease in Amsterdam shortly after the quarter ended.

All told this year, management expects to sign at least 100 MW of new leasing. And its existing backlog should drive 25%+ data center revenue growth for 2026 and contribute more than $350 million of incremental revenue from here.

Not bad for a former mushroom farm, right?

It’s also impressive how Iron Mountain has delivered a 605% total return since my May 2020 recommendation… compared to the S&P 500’s mere 161%. Less impressive, however – at least for new investors looking to get in on all of this profit and profit potential – is how it’s trading at more than 54x earnings.

That’s exceptionally far above its normal valuation of approximately 30x.

Don’t get me wrong. I remain very impressed by Iron Mountain’s evolution. Its management team is super sharp, maintaining a balance sheet that gives it plenty of room to run from here.

Even so, I don’t believe in overpaying for quality. That’s a recipe for stagnant growth or – at Iron Mountain’s current price point – even significant losses that could take years to recover from.

I know everyone wants a piece of the data center trade these days. And I assure you that my Wide Moat Research team and I have our trained eyes open to spot any such deals.

In fact, we’ve already identified a few other ideas that are benefitting from AI… just at much more attractive prices. So stay tuned for those writeups later this week.

I don’t think you’ll want to miss them.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

We put together another great Wide Moat Show episode for you last week titled “7 Strong Buys”… two of which come with especially attractive price points.

There are always worthwhile bargains to be found in the stock market, no matter what. And we’re proving that with finds like:

Discover all this and more when you click right here.