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Equinix (EQIX) Stock | NASDAQ: EQIX

Covered by Stratosphere

Data: The World's Most Valuable Commodity

Equinix is a digital infrastructure company founded in Silicon Valley in 1998 by Jay Adelson and Al Avery, both former facilities managers at Digital Equipment Corporation, a computer hardware, software, and services company acquired by Compaq in 1998.

Equinix started as a vendor-neutral, multi-tenant data centre provider with the aim to enable secure connectivity and networks to share data traffic with each other and scale internet usage. The name "Equinix" stems from the words Equality, neutrality, and internet exchange.

Equinix operates as a Real Estate Investment Trust ("REIT") - a REIT is a corporate structure that does not pay any federal tax in the US under the condition that over 90% of its taxable income is paid out to shareholders as dividends.

Stratosphere Score

8

Growth

5

Valuation

7

Quality

6

Margins

7

Dividend

8

Balance Sheet

5
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

Investment Thesis

  1. Equinix, Inc. ("Equinix") is a global digital infrastructure company, operating data centres used by the world’s digital companies, including telecommunications networks, cloud and information technology ("IT") providers, financial services, social media networks, and other large enterprises.

  2. Equinix focuses mainly on interconnections provided in its retail colocation ecosystem of data centres, where tenants can communicate and easily share critical data with each other to reach mutual business objectives.

  3. Equinix benefits from strong network effects and switching costs due to its large network of enterprises that use its data centres, and the "stickiness" of the interconnected relationships formed between tenants once they place equipment in Equinix data centres.

  4. The shift to the cloud (and hybrid cloud), edge computing, and skyrocketing data consumption act as tailwinds to Equinix data centres. We expect Equinix to lead these secular trends with its retail colocation model and large global footprint, factors that will prove to be extremely valuable to tenants.

  5. Equinix is expanding rapidly at the expense of healthy cash returns today. There is a major risk if technologies improve and reduce the need for physical data centre space or if digital adoption does not increase at the pace Equinix expects.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Equinix enjoys network effects as more customers choose Platform Equinix for their colocation and interconnection needs. Equinix’s data centres act as hubs within a larger digital ecosystem where tenants deploy distributed, interconnected IT infrastructures to deliver quality services to end users and communicate with other tenants within the ecosystem. It benefits organizations to colocate within the same data centres for performance and economic reasons.

The large number of interconnections Equinix created and the widespread ecosystem of 230+ data centres worldwide are attractive for large cloud companies and network providers when considering where to host their services. As many of these large enterprises ultimately choose Equinix data centres to host their networks and infrastructure, other companies are inclined to colocate and interconnect with these tenants and across multiple global locations.

Equinix Interconnection DiagramSource: Equinix Interconnections Blog

Equinix generates attractive returns on retail colocation facilities, spurring reinvestment into more data centres, creating more interconnections, and further deepening the powerful network effects Equinix holds.

Equinix is still in growth mode and every additional data centre is helping contribute to the bottom line rather than dilute it. Gross profit per average data centre operated is a great metric to track to see how strong Equinix's underlying economics truly are. New builds, expansions, and acquired data centres will not operate at full capacity off the bat. Therefore, Equinix's ability to keep gross profit per average data centre operated is extremely encouraging.

There are significant switching costs associated with data centre tenancy, especially Equinix's data centres. Tenants are initially attracted to Equinix's large global footprint, colocation with almost 10,000 customers including some of the world's most important business (i.e., hyperscale cloud providers, ISPs, social media networks, etc.), and general economics of leasing data centre space rather than building their own spaces.

There are few upfront costs, capacity could be added quickly and with relative ease, greater access to space could be provided given Equinix's massive scale and growing data centre portfolio, and no maintenance costs on the part of the tenant if they choose to lease through Equinix. Once the tenant joins Equinix for its global reach and colocation and interconnection benefits, it is difficult to cut ties with Equinix.

Contractual terms aside, a tenant that begins making interconnections with other crucial firms within Equinix data centres and sets up in critical markets around the globe, they would face large-scale business interruptions if they were to choose to uproot their servers and move elsewhere. Switching out of Equinix's high-quality data centres is economically unattractive as well – while the average tenant pays between $1,550 and $2,450 MRR per cabinet, the average cost to move a cabinet is about $10,000. Even if a tenant were to get a steep $500/month discount at a competing data centre, it would take almost two years for this decision to pay off. For these reasons, churn rates remain consistently below 3%.

These network effects and switching costs place Equinix in a competitive position with pricing power. According to Evercore ISI research, Equinix can charge approximately 15% to 20% more than its competitors in most markets before considering interconnection benefits and additional services. If you recall, Equinix provides (1) Space (2) Power and (3) Interconnection, going beyond a simple real estate service that provides (1) and some of (2). Tenants take advantage of the highest quality data centre locations with the largest networks, and they are willing to pay a premium to be there.

Opportunities Ahead

  • The world is going digital. Global digital transformation, rising mobile device penetration, 5G, augmented and virtual reality (i.e., AR and VR), internet of things ("IoT") adoption, and growing data and content consumption are all poised to increase at rapid rates. 5G connections are expected to rise to 1.4 billion worldwide, up 100x from 2019, a mere four-year window. Almost 300 billion apps will be downloaded by 2023 and 1 trillion devices will be connected to the internet by 2030. This growth in devices, data consumption, and digital technologies will create 175 zettabytes ("ZB") - 175 trillion gigabytes – by 2025, up from about 55 ZB in 2020 for a compounded annual growth rate of ~25%. All this data must be stored, processed, and created somewhere and that location will be in data centres. Equinix is the largest global data centre operator with the highest number of interconnections - this positions Equinix as the best operator to absorb all this demand.

  • Cloud 3.0 and edge computing will further increase demand for data centres. The first wave of cloud adoptions saw organizations taking computing off-premises and instead opting for cloud services like AWS, Azure, and GCP for cost savings and business agility. Within this wave, each cloud provider differentiated themselves from others by specializing in certain fields (ex. AWS and ecommerce or GCP and web & app development). These value propositions from specialized cloud services drove a second wave of cloud adoption characterized by demand for multi-cloud environments whereby customers would sign up for two or more cloud services for different uses. Today, it appears we are entering a third wave of cloud adoption again catalyzed by the previous wave. Equinix will be the ultimate beneficiary of this trend as its colocation model and vast number of cloud on-ramps (i.e., private, direct connections to the cloud) provides a one-stop shop for enterprises looking to host a private cloud and directly connect to public clouds within the same building. Equinix provides almost 200 such cloud on-ramps, more than double the amount the next closest competitor, Digital Realty, hosts.

Risks

  • ROICs are low and could prove destructive if data centres are not adopted at the speed or utilization rate expected by management. It is crucial that all investments made by Equinix are made prudently and with the expectation of eager uptake by customers in the future in this capital-intensive business.

  • On a similar note, Equinix is highly leveraged (it holds lots of debt relative to its EBITDA). This is to be expected and normal, though, for a real estate company that also has access to cheap financing. However, Equinix's leverage ratio (net debt excluding leases / EBITDA) has been steadily rising for some time. The figures below exclude leases for comparison purposes to account for the semi-recent lease accounting changes.

  • Equinix operates on a global scale, giving rise to currency risks. Although we do not expect substantive volatility in foreign currencies versus the US dollar, financials could be adversely impacted if the US dollar strengthens against local currencies.

  • Equinix finances a substantial portion of its capital investments with equity. Equinix has issued several billion shares in recent history and repurchased nil. Equity investors could be significantly diluted if accretive investments do not outweigh the pace of equity issuance.

  • Technological enhancements that reduce latency and / or the need for data centre real estate would likely pressure demand for Equinix's services and adversely impact financials. Tenants would downsize in this scenario and increase vacancy in Equinix's vast ecosystem of data centres.

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