2023-04-29 05:56:21 ET
Summary
- Owning physical buildings for data centers might seem like a low-return investment for high-growth tech companies.
- Equinix specializes in providing physical buildings for data centers.
- Equinix has delivered 20 years of consecutive quarterly revenue growth, with no down quarters in 80 consecutive quarters.
- I believe that its potential for growth justifies the premium.
In today's digital age, businesses are increasingly reliant on cloud-based services and prefer to rent or lease storage, data capacity, and computing power instead of owning physical data centers. As such, owning physical buildings for data centers might seem like a low-return investment for high-growth tech companies. Equinix (NYSE: EQIX) has established itself as a leader in the industry, with a proven track record of delivering 20 consecutive years of quarterly revenue growth and no down quarters in 80 consecutive quarters. This unmatched performance speaks to the reliability and profitability of Equinix's business model. With its impressive growth potential, strong financials, and promising dividend yield, I believe Equinix is a smart buy for investors.
Investment thesis
Equinix is the largest data center operator in the world, with a presence in over 200 centers across the Americas, Europe, and Asia. As data traffic continues to skyrocket, so too does the company's stock price, with data center IP traffic increasing from 3 zettabytes in 2013 to 21 zettabytes in 2021. The demand for data shows no signs of slowing down, and Equinix is perfectly positioned to take advantage of this trend.
Global data centre IP traffic from 2013 to 2021(in zettabytes per year) (Statista)
The market opportunity for the company is massive and only growing larger, thanks in part to emerging technologies like artificial intelligence and autonomous vehicles. Data is the driving force behind this growth, particularly in the wake of the pandemic, which has led to a surge in remote work, video conferencing, and other online activities. Equinix stands to benefit from these trends, but it's not just about sharing data remotely. The company is also well-positioned to capitalize on the Internet of Things, connecting everything from distributed sensors in connected cars to manufacturers' data systems and third-party cloud infrastructure.
Equinix's dedicated, software-defined interconnections make all of this possible, thanks to the Equinix Cloud Exchange Fabric. With all of these elements housed within Equinix's data centers, the company is poised to ride the data wave to even greater success in the coming years.
Know where to build
Large macro-edge data centers, also known as hyperscale data centers, are ideal for hosting AI training hardware. Equinix, with its nearly unmatched global data center portfolio, is perfectly positioned to meet the needs of AI applications as markets continue to develop.
Equinix operates massive xScale data centers designed to empower AI training, as well as smaller retail-oriented data centers that can meet the low latency needs of AI-powered interface applications at the edge. Equinix's highly interconnected and secure network is also vital for providing AI solutions with secure access to external data sets. With Equinix, AI solutions can easily and quickly access the data needed to generate outputs. Equinix is ideally suited to meet the needs of AI. It has a nearly unmatched global data center portfolio:
The company's large and growing data center portfolio positions it to meet the needs of AI applications as markets develop. It operates massive xScale data centers to empower AI training and smaller retail-oriented data centers that can meet the low latency needs of AI-powered interface applications at the edge. Equinix also has a highly interconnected and secure network. That's vital for providing AI solutions with secure access to external data sets. AI solutions running at Equinix data centers can easily and quickly access the data needed to generate outputs. For example, the company has partnered with Nvidia ( NVDA ) and others on comprehensive AI solutions. In 2021, Nvidia revealed its AI LaunchPad program through a partnership with Equinix. It allows Equinix customers to develop advanced AI using technology designed by Nvidia. It reduces energy use at data centers and improves performance, which will help lessen the environmental impact of AI applications running at its data centers. With customers like Verizon ( VZ ), Salesforce ( CRM ), Oracle ( ORCL ), and Amazon AWS ( AMZN ), Equinix is well-positioned to play a crucial role in accelerating the rollout of AI technology.
Equinix Customers (Equinix)
The company continues to build the foundation for future growth. It has recently approved several new data center expansion projects, giving it the capacity to continue signing new deals. It most recently unveiled plans to expand in Montreal and build a new data center in Barcelona. That follows recent announcements to enter South Africa with a $160 million data center investment and Malaysia with a $40 million data center investment. Overall, the company has 49 major builds underway across 35 markets. Moreover, Equinix has achieved attractive returns of approx. 30% on its prior developments.
Those expansion projects provide lots of visibility into its future growth since Equinix typically signs leases for some capacity before construction begins. For example, Colt Technology Services signed on as the first customer for its new site in Barcelona. The data center space puts Colt in a strong position to drive its next growth wave. Projects like that also help drive a steady stream of revenue growth for Equinix.
Financials
Equinix has a strong balance sheet, allowing the company to make acquisitions as opportunities arise. Its history of making attractive deals has contributed to the company's top-line growth and bottom-line growth.
Equinix has achieved an impressive compound annual growth rate of 14% for its top line, adjusted EBITDA, and a faster 16% for its AFFO. However, Seeking Alpha expects a slowdown to an annual growth rate of 11% for the next five years, while Wall Street forecasts higher growth estimates in the high teens .
Equinix Revenue Estimate (Seeking Alpha)
Equinix's debt has been growing as the company expands, but its EBITDA has followed suit. The company's total debt to adjusted EBITDA ratio is 4.51x, which is not large enough to cause significant concern.
For income-oriented investors, while Equinix's current dividend yield of 1.89% is not the best compared to the sector average of 4.42%, the company has achieved a compound annual dividend growth of 9% in the last five years and has consecutively increased its dividend for the last seven years.
In terms of the dividend payout ratio, REITs typically use Adjusted Funds from Operations (AFFO) as a metric. AFFO is a metric that adjusts for the heavy noncash depreciation that obscures the net income line. To measure the dividend payout ratio, REITs typically use Adjusted Funds from Operations (AFFO), which adjusts for noncash depreciation. Equinix expects a forward AFFO payout ratio of approximately 43% for 2023, leaving room for a more aggressive dividend increase if necessary. The standard payout ratio ranges from 55% to 70%, and Equinix's AFFO payout ratio provides investors with reassurance that the company can pursue investment opportunities and still reward shareholders.
Debt and currency risk
Equinix has been steadily building its business through real estate acquisition, resulting in a considerable amount of debt of $16.5 billion, with $3.5 billion maturing before 2027. While high-interest rates could result in increased interest expenses and negatively impact earnings, none of the debt is set to mature in 2023, allowing time for the Fed (and other central banks) to potentially lower interest rates before Equinix refinances it.
Additionally, 39% of Equinix's revenue is in U.S. dollars, while the remaining 61% is in various currencies. Currency exchange rates remain volatile and should be monitored, as they could potentially impact the company's revenue. Despite these concerns, Equinix's strong financial position and disciplined approach to debt management should provide some assurance to investors.
Valuation
Equinix's stock has demonstrated a range of $495 to $763 in the last 52 weeks and is currently priced around $716. In 2023, the management expects to generate AFFO within the range of $30.79 to $31.64 per share. This means that Equinix is trading for 23 times its current share price at the midpoint. Seeking Alpha estimates an FFO per share of 21.20, which would indicate a year-over-year growth of only 6.61%, but a revenue growth of 12.69% YoY.
Equinix has only one public competitor in the Data Center REIT industry, which is Digital Realty Trust ( DLR ). However, to make a more comprehensive comparison, it is useful to include some other REITs. Public Storage ( PSA ), American Tower Corporation ( AMT ), and Crown Castle Inc. ( CCI ) are among the REITs that are relevant for comparison.
Company Name | Market Cap | EPS | P/E | Price to Operating Cash Flow | P/FFO | ROIC |
67.32 | 7.68 | 94.01 | 22.37 | 25.84 | 3.02% | |
30.25 | 1.14 | 87.28 | 17.62 | 14.69 | 1.13% | |
53.33 | 3.86 | 31.93 | 18.24 | 15.66 | 5.72% | |
51.55 | 23.49 | 12.53 | 16.64 | 9.87 | 25.45% | |
95.84 | 3.84 | 53.41 | 25.66 | 18.66 | 3.42% |
When compared to Digital Realty, Equinix has a higher EPS and is trading at a similar level in terms of price-to-earnings ratio, although slightly higher. However, there is a wider gap when comparing price-to-operating cash flow and price-to-FFO. The return on investment capital is three times higher, although only 3%.
When considering a wider peer group, Equinix is still more expensive than its peers. However, this is mainly due to the potential for growth in the huge AI addressable market. Investors are willing to pay a premium for Equinix because of its potential for growth, making it an attractive investment opportunity.
Equinix's future looks bright
As the demand for data continues to grow, Equinix is well-positioned to benefit from this trend. Being the world's largest data center operator, the company has room for significant growth with an AFFO payout ratio of approximately 43%. While tech stocks may not be for everyone, Equinix offers a unique opportunity to gain exposure to the AI market. Despite the company's current high valuation, I believe that its potential for growth justifies the premium, and shares of Equinix appear to be undervalued from a long-term perspective.
For further details see:
The Future Of AI: Why Equinix Is The Key Player To Watch