IR_Stone Introduction
As the digital economy continues to expand and the AI revolution gains momentum, the demand for processing power and data centers is increasing rapidly. Equinix (NASDAQ:EQIX) is a strategic powerhouse that supports this revolution. With over 250 data centers worldwide and ongoing expansion plans, Equinix is well-positioned to meet the growing demand. Over the past 5 years, shareholders have enjoyed significant returns, with the stock price increasing by over 124%.
As the digital transformation and AI revolution show no signs of slowing down, Equinix seems poised for further growth, offering potential rewards for shareholders. In this article, I will delve deeper into why I believe Equinix is an attractive investment opportunity.
Company Overview
Founded in 1998 and headquartered in Redwood City, California, Equinix is a leader in digital infrastructure. The company’s core offering revolves around strategically located data centers around the world. Currently, Equinix operates over 250 data centers in 32 countries, with ongoing expansion projects.
By strategically placing data centers globally, Equinix benefits from an unmatched geographic footprint, allowing customers to deploy in multiple regions with the same data center provider. This unique differentiator has attracted many customers, with 77% of them operating across multiple regions. The company’s revenues are split across regions, with a slight bias towards the Americas at 44%, followed by EMEA at 35% and Asia-Pacific at 21%. Equinix has a diverse customer base, with the top 10 customers accounting for 18% of revenue and the top 50 customers accounting for 38%.
Long-Term Demand for Digital Infrastructure
One of the key drivers of Equinix’s revenue growth is the secular growth of the digital economy. The ongoing momentum from digital transformation and the AI revolution is creating strong demand for data centers, particularly in the United States where data center demand is projected to grow by 10% annually until 2030.
Equinix has capitalized on the high barriers to entry in this industry, including significant capital costs and the network effect, making it a formidable player in meeting the increasing demand for digital infrastructure. Its globally differentiated portfolio of data centers and interconnected ecosystems enables it to attract customers on a global scale. Recent AI deal wins with Harrison.ai and Lambda showcase Equinix’s commitment to staying at the forefront of technological advancements. The company expects its new build data centers to be over 80% utilized within 2-5 years, highlighting the robust demand for its services. The acceleration of digital transformation and the AI revolution serve as significant catalysts, driving the demand for data centers and interconnection. Factors such as enterprise transformation, cloud computing, digital automation, and the ongoing AI revolution contribute to the heightened need for Equinix’s digital infrastructure solutions. With the demand for digital infrastructure continuing to surge, Equinix appears poised for further growth in the coming years, offering shareholders the prospect of participating in this expansive trajectory.
Solid Business Model
Equinix’s high recurring revenue business model is a strong growth driver, ensuring stable cash flows and underpinning its financial performance. Over 90% of its total revenues are predicted to be recurring, demonstrating resilience in revenue generation. The stickiness of interconnection leases contributes to the high-margin interconnection revenues. Equinix also employs strategies to sustain and enhance recurring revenue, including contractual price increases of 2-5% per year. The company maintains high utilization rates and low churn, showcasing the reliability and stability of its revenue streams.
These factors, combined with Equinix’s strong balance sheet, contribute to its financial strength and position the company favorably for continued growth in the digital infrastructure landscape. Equinix has a liquidity of $6.7 billion as of October 2023, a net leverage ratio of 3.5, and a weighted average debt maturity of 7.8 years. The company is committed to shareholder value, as reflected in its dividend performance. It recently increased its dividend by 25% to $4.26 per share, with a five-year annualized dividend growth rate of 8.36%. This high recurring revenue business model and strong balance sheet make Equinix well-positioned for robust future growth.
Q3 Results
Equinix released strong Q3 results on October 25th, surpassing expectations. It reported funds from operation (FFO) of $5.97, beating estimates by $0.58. Revenue of $2.06 billion aligned with projections, representing a 12% year-on-year increase. The company closed 4,200 deals across 3,100 customers in Q3, securing record new logos from high-propensity clients. For the full year, Equinix anticipates a 12-13% year-on-year revenue increase, with adjusted EBITDA reaching $3.7 billion and a 45% margin, driven by favorable operating costs. Adjusted funds from operation (AFFO) is expected to be around $32 per share. In response to its robust performance, Equinix increased its quarterly cash dividend by 25% to $4.26 per share. The company’s CEO, Charles Meyers, highlighted Equinix’s strategic positioning in the AI ecosystem and its role as the hub for private AI operations. The company’s expansion plans and innovative initiatives, including AI-focused projects and global interconnection growth, underscore its positive outlook.
Valuation
To estimate Equinix’s fair value, I used a discounted cash flow model for the period up to 2027. I assumed that Equinix’s average EBITDA margin and unlevered free cash flow as a percentage of EBITDA margin would remain constant at 45% and 85%, respectively, based on their past 5 years’ performance. For future revenue, I used analyst predictions found on Seeking Alpha. I assumed that cash and debt would remain constant throughout the period. To establish the terminal value multiple, I used the midpoint between the company’s EV/EBITDA multiple and the sector median, resulting in an exit multiple of 24. Despite appearing high, this value is justified given the robust growth prospects. Utilizing this multiple yields an undiscounted terminal value of $126 billion. For the discount rate, I selected a value of 10% as the minimum return target. Running the model, I determined the present enterprise value of the company as the sum of discounted unlevered free cash flow to 2027 plus the discounted terminal value. This yields a fair market cap of $82.9 billion, or $881 per share. This suggests a potential upside of 11% from today’s share price of $794.60.
Risks
When evaluating an investment in Equinix, there are three main risks to consider. Firstly, exposure to the rental market poses risks of non-renewal. While demand for digital infrastructure is currently strong and expected to grow, there is a risk of competition and potential oversupply in the market, leading to lower margins for Equinix as competition forces rates down. However, Equinix’s existing portfolio is partly protected from this risk due to an average lease maturity of over 18 years, including extensions. Additionally, Equinix’s leasing model minimizes capital at risk when expanding into new locations.
Secondly, energy prices pose a concern. Data centers are energy-intensive, consuming over 1% of the global electricity supply. Higher energy prices, paired with the increasing power consumption of higher-end chips, can result in higher electricity costs for Equinix. If these costs cannot be fully passed on to customers, it could lead to lower margins and profits.
Lastly, the risk of prolonged elevated interest rates should be considered. If interest rates remain high for an extended period or increase further, Equinix will face higher borrowing costs. Additionally, the value of its assets on the balance sheet may decrease compared to a scenario with lower interest rates. However, potential rate cuts, as suggested by some investors amid falling inflation, could positively impact Equinix’s asset valuations and borrowing costs.
Conclusion
In conclusion, Equinix is well-positioned to benefit from the digital revolution, with its strong financial performance and strategic positioning making it an attractive investment opportunity. With the increasing need for digital infrastructure as the AI revolution unfolds, Equinix is poised to meet the growing demand. Based on my calculations, Equinix currently has a fair market value of $82.9 billion, or $881 per share, suggesting an upside potential of 11% from the current share price. While there are risks to consider, the company’s solid business model and strong balance sheet make it appear set for robust future growth.
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