Under the Spotlight Wall St: Equinix (EQIX)

Equinix ($EQIX) holds a record that would have seemed unimaginable two decades ago: 87 consecutive quarters of revenue growth.

That winning streak has lifted shares in the data centre giant to record highs and a US$90b market cap. It’s a far cry from its near-death experience during the dot-com era. After an IPO at the peak of the bubble in 2000, Equinix narrowly avoided bankruptcy amid the tech carnage that ensued. 

Twenty years later, data is king. Equinix now wears the crown as the leading provider of digital infrastructure – like data centres and connectivity services – to the world’s biggest companies. The rise of AI and the cloud has made storing and accessing data more important than ever, and Equinix is investing heavily to satisfy clients’ need for speed and security. 

As we've seen, demand and pricing power is strong in this sector. This is underscored by the $24b price tag for the acquisition of Airtrunk and the $2.7b market cap for soon-to-be-listed DigiCo Infrastructure REIT ($DGT). To stay ahead of the pack, Equinix is banking on its reputation as a trusted global provider with 99.9999% uptime.  

All about scale

Equinix’s scale and footprint is its competitive advantage in an era where data is global. It operates 268 data centres across 73 metro areas in 34 countries. It owns 163 of those data centres. Not that the company calls them that. International Business Exchange (IBX) is their trademarked name, meant to convey reliability and security for the world’s biggest companies. 

Equinix has benefited as companies have shifted to the cloud, much like Oracle ($ORCL), which we recently covered. Its co-location service allows clients to lease server space inside an IBX rather than build their own data centre. This spreads the cost of cooling and security among many clients. It also offers connectivity services and flexibility. Equinix allows clients to select among thousands of networks, enterprises and cloud and IT service providers, instead of being locked in with a particular vendor.

The combination of flexibility, security and reliability was highlighted in Equinix’s Q3 earnings. It reported record bookings among clients and revenue rose 6.7% year-on-year (YoY) to US$2.20b – three quarters of which came from co-location. Net income rose 8% YoY to US$297m. The Americas reported a 5% YoY revenue increase, but the strongest growth was in the Asia-Pacific: up 14% YoY to US$500m. 

It’s a good time to run a digital infrastructure business. CEO Adaire Fox-Martin said pricing  ‘remains robust right across all theaters of operation’ during an analyst call on 30 October. While customer churn is low, clients exiting allowed Equinix to replace them with ‘much higher value workloads.’ It’s little surprise that the healthy pricing environment translated to an upgrade to full-year revenue guidance: from US$8.692b-US$8.772b to US$8.748b-US$8.788b.

Data into dollars

Digital infrastructure isn’t cheap, though. And it’s about to get a lot more expensive given the rise of AI. In Q3, Equinix spent US$655m on major projects and opened new projects in New York, Tokyo, Melbourne and Istanbul, among many major cities. It also spent US$69m on maintenance, sustaining IT and installation. 

Equinix’s latest deal underscores the scale of investment needed to construct bigger data centres needed for AI. A joint venture signed in October with Canada Pension Plan Investment Board and Government of Singapore Investment Corporation (GIC) seeks to raise US$15b. Equinix has a 25% stake. The capital will be used to accelerate Equinix’s xScale program aimed at hyperscalers, or large cloud platform providers. Multiple xScale facilities exceeding 100 megawatts will be built in the U.S., adding more than 1.5 gigawatts of new capacity for hyperscale customers. Equinix currently has 20 xScale facilities.

The company has a track record of turning investment into profit. Its ‘stabilised’ data centres – those no longer being expanded or redeveloped – have an asset value of around US$16.6b. They’ve produced revenue of US$6.3b over the past four quarters and cash gross profit of US$4.25b. Expenses are only 2% of revenues. The typical new data centre is more than 80% utilised in two to five years and hits cash flow breakeven within six to 12 months. Three quarters of Q3 revenue came from stabilised data centres. 

Solid cash flows not only provide capital for additional investment, but also for dividends. These have grown every year since Equinix converted to a real estate investment trust in 2015. A total dividend of US$1.62b will be paid in 2024, to surpass US$6b in dividends paid to shareholders since 2020. 

Mega trendy

Equinix is in the right industry at the right time. While investing in speed and scale will come with a hefty price tag, the demand for data centres and connectivity gives it a strong hand to raise prices. These tailwinds should allow the company to extend its record-breaking run of quarterly revenue increases.   

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.