Equinix Extends Data Center Presence

Equinix Inc. ( EQIX - Analyst Report ) recently announced the expansion of its second International Business Exchange (IBX) in Singapore. This particular data center, dubbed SG2, is expected to cater to the growing market demand from cloud-based service providers as well as financial service providers. The expansion involves an additional investment of $28.5 million to increase the cabinet count to 3,256.

The expansion of its data centers in Asia and Europe had a positive impact on the business volume of the company.

As per recent studies conducted by research firms Frost and Sullivan and Gartner, data center growth in the Asia-Pacific will be the most sought after with China emerging as the second largest data center market in the world by 2015.

Within Asia, Singapore is another favored destination. As per a recent survey by the “Singapore Economic Development Board,” this trade and commerce hub of Asia controls around 50.0% of South East Asia’s data center capacity. With the fourth phase of expansion, Equinix is expected to meet the data center demand in Singapore.

This apart, a recent survey conducted by a data center dedicated website, datacenterdynamics.com, on 100,000 facilities shows that data center usage is expected to grow around 7% in 2012. Moreover, the website has also increased its investment projection on new data centers from about $30.0 billionin 2010-11 to $35.0 billion in 2011-2012.

We believe this is good news for networking companies and data center service providers like Equinix, Juniper ( JNPR - Analyst Report ) and Cisco Systems ( CSCO - Analyst Report ) , which are taking necessary steps to seize this opportunity in the data center business.

Apart from Singapore, China, India, Japan and Australia, the United States offers good growth opportunities. We believe that favorable pricing trends in the U.S., coupled with planned expansion, have the potential to boost revenue growth in the upcoming quarters.

On the other hand, another set of industry experts believe that the telecommunications industry is currently in the middle of cut-throat competition. In many cases, customers are combining their businesses, thus reducing their co-location space requirements. They are also looking for innovative ways to better utilize existing co-location space. These actions are secular headwinds for a company such as Equinix.

However, we expect that these actions will be more than offset by the growing demand for data center services, since many more companies are moving to the cloud, and Internet usage continues to grow steadily year after year.

Equinix delivered good first quarter 2012 results with EPS exceeding our expectation. Moreover, revenue grew substantially on a year-over-year basis as the company is witnessing improvement in mobility, cloud computing and data management.The company is also experiencing improvement in business fundamentals across all segments, along with a better supply chain process and better pricing environment.

We are also optimistic about the company’s recurring revenue model and current expansion plans. Despite all the positives, competitive threats from the likes of AT&T Inc. ( T - Analyst Report ) and Verizon Inc. ( VZ - Analyst Report ) raise our apprehension. European exposure and industry consolidation also concern us.

Equinix has a Zacks #2 Rank, implying a short-term Buy rating