2023-05-06 05:04:51 ET
Summary
- Equinix has returned yet another impressive quarterly report, managing to grow both its top and bottom lines.
- The company has now posted 80 consecutive quarters of revenue growth, the longest by any company in the S&P 500.
- Equinix's business model provides great visibility, and the powerful secular trend of cloud computing should yield many more years of growth.
About a decade ago, I was a contributor on a different platform prior to joining Seeking Alpha when I became fascinated by real estate investment trusts (REITs). Back then, REITs were viewed as an efficient vehicle for investors of all stripes to gain exposure to the real estate asset class. REITs in general had a pretty good track record of strong long-term total returns, good liquidity, high dividend yields and ability to act as an inflation hedge. Mortgage REITs AGNC Investment Corp (AGNC), formerly known as American Capital Agency Corp., and Annaly Capital Management, Inc. (NLY) were my favorites before the infamous taper tantrum of 2013 routed the entire sector. As a long-term investor, I quickly decided the sector was too volatile for my liking since it's hard to predict how different REITs will react to changes in interest rates. I have been somewhat vindicated since the sector has never fully recovered as we shall see shortly.
I scoured high and low trying to find a more stable and more predictable REIT sector, one that could almost guarantee steady returns over long timeframes, before I came across Equinix Inc. (EQIX). Equinix is a data center REIT that provides global data center and colocation services for enterprise network and cloud computing. Equinix owns and operates a network of 240+ International Business Exchange (IBX) data centers located in 32 countries and 71 major metros around the world to make interconnection easy. Back then, cloud computing was still at its infancy and only Amazon Inc.'s (AMZN) cloud service, AWS, was well established. However, it was quite evident that this was a new secular megatrend with long growth runaways, possibly on the same level as the software revolution of a decade prior, due to the obvious advantages of cloud computing over on-premise storage: flexibility, reliability, scalability, affordability and security. I was bullish on Equinix from the get-go.
Equinix has built a reputation for engineering its data centers for reliability. As early as 2008, the company claimed that its U.S. data centers had reached "six nines" of reliability (99.9999 percent uptime or 31.56 seconds downtime in a year), a level that almost no other data center REIT can match. That track record has helped the company attract more than 10,000 customers including 2,100 network providers as well as giant cloud companies Amazon, Alphabet Inc. ([[GOOG]], [[GOOGL]]), Microsoft Inc. ( MSFT ) and Oracle Corp. (ORCL). Equinix says its impressive uptime strategy is built atop a redundant power and cooling infrastructure.
Well, there's something else that Equinix has established a reputation of being highly reliable at: Growth.
Equinix reported its Q1 2023 earnings on Wednesday, and once again proved it's a bona fide growth machine. Q1 revenue clocked in at $2B (+15.6% Y/Y), $30M above the Wall Street consensus while Q1 FFO of $5.87 beat by $0.54. That marked the 80th consecutive quarter of uninterrupted revenue growth by the company, the longest growth streak by any company in the S&P 500.
Equinix recorded growth in virtually all its profitability metrics
Adjusted EBITDA came in at $944 million, a 13% Q/Q increase while adjusted EBITDA margin was 47%. Operating Income was $384 million, good for 36% Q/Q growth while Net Income was $259 million, a 101% Q/Q. AFFO came in at $802 million, a 22% Q/Q increase, while AFFO per Share clocked in at $8.59, a 21% Q/Q increase.
It's not hard to see why this company has been able to maintain solid growth for so long. Other than being one of the most reliable data center REITs globally, Equinix has branded itself as an agnostic "one-stop shop" that helps companies store their data more efficiently and improve profitability, meaning it's able to work with a wide variety of workloads and cloud providers. About 95% of the company's revenues recur monthly with 90% coming from existing customers.
More importantly, the transition from on-premise to the cloud is showing no signs of losing momentum. According to Equinix 2022 Global Tech Trends Survey (GTTS), where cloud services already play within the digital economy, there's still plenty of room for growth with 71% of global IT leaders saying they were likely to move more functions into the cloud in the current year. Top cloud service providers (CSPs ) continue to expand their cloud capacity with new locations and optimized hardware platforms. They are also enhancing their hardware in a bid to support greater densities as well as cloud-adjacent deployments at edge locations or customer premises. Equinix has little trouble bringing in new customers, managing to close ~4,000 deals across more than 3,000 customers during the last quarter.
Equinix's highly reliable and predictable business model with great revenue visibility is a big reason why the company has been able to maintain growth through both good and poor economic cycles, including during the 2008 financial crisis. It's also the reason why its shares have outperformed other REITs, with only fellow data center REIT, Extra Space Storage Inc. (EXR), coming close, though its performance has deteriorated markedly over the past two or so years. EQIX has been good for a 13.4% annualized return over the past decade, considerably better than 9.4% by the S&P 500.
Security | Dividend Yield | Year-to-Date Returns | 12-Month Returns | 5-Year Returns | 10-Year Returns |
S&P 500 | 1.65% | 6.4% | -5.6% | 52.3% | 151.4% |
Equinix ( EQIX ) | 13.6% | 10.1% | -0.4% | 80.6% | 240.7% |
Digital Realty Inc . ( DLR ) | 5.09% | -6.8% | -33.7% | -9.9% | 48.3% |
Extra Space Storage Inc. ( EXR ) | 4.5% | -22.9% | 63.6% | 236.8% | |
Vanguard Real Estate ETF ( VNQ ) | 4.1% | -1.1% | -21.4% | 5.6% | 6.6% |
VanEck Mortgage REIT Income ETF ( MORT ) | 13.5% | -14.4% | -36.9% | -56.1% | -61.5% |
Schwab U.S. REIT ETF ( SCHH ) | 3.0% | -0.5% | -19.9% | -2.8% | 9.0% |
Real Estate Select Sector SPDR Fund ( XLRE ) | 3.6% | -0.5% | -20.7% | 17.8% | 18.7% |
Vanguard Global Ex-U.S. Real Estate ETF ( VNQ I) | 0.6% | -0.5% | -14.6% | -31.6% | -32.2% |
Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF ( SRVR ) | 2.3% | -0.2% | -22.9% | 18.6% | N/A |
i Shares Residential and Multisector Real Estate ETF ( REZ ) | 3.4% | 4.9% | -19.5% | 18.3% | 30.3% |
Equinix provided solid full-year 2023 guidance as follows:
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Revenues
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$8.175 - $8.275 billion, an increase of 13 - 14% over the previous year, or a normalized and constant currency increase of 14 - 15%
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An increase of $30 million compared to prior guidance at the mid-point
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Adjusted EBITDA
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$3.635 - $3.715 billion, a 45% adjusted EBITDA margin
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An increase of $20 million compared to prior guidance at the mid-point
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Assumes $33 million of integration costs
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AFFO and AFFO per Share
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$2.927 - $3.007 billion, an increase of 8 - 11% over the previous year, or a normalized and constant currency increase of 10 - 13%
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An increase of $44 million compared to prior guidance at the mid-point
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$31.15 - $32.00 per share, an increase of 5 - 8% over the previous year, or a normalized and constant currency increase of 8 - 11%
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Assumes $33 million of integration costs
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So shareholders can look forward to more quarters of strong growth. Equinix's 13+ percentage revenue growth might not match that of many software or cloud companies its size, but is more than double the sector's median at 6%. The one big weakness by EQIX is its lofty valuation. Its P/ AFFO ((TTM)) of 34.3 is way higher than the sector's median at 14.5. Thankfully, it has been coming down, with the metric expected to shrink to 23.1 over the next 12 months.
For long-term investors looking to avoid stomach-churning and highly volatile investments as we head into the next recession, Equinix is cut just right thanks to its track record of steady and reasonable returns in good or bad times.
For further details see:
Equinix: A Solid REIT With The Longest Growth Streak In The S&P 500