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Expansion Strategy Aids Equinix (EQIX) Amid Stiff Competition

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Recognizing the demand for interconnectivity-focused data centers, Equinix Inc. (EQIX - Free Report) is aiming to expand data-center capacity in key markets, and strengthen its competitive positioning as well as global reach via acquisitions. However, given the upside potential in the data center space, the company is being affected by stiff competition and the resultant aggressive pricing pressure.

The demand for its interconnected ecosystem remains strong due to acceleration in enterprise cloud adoption, and increasing cloud as well as Internet demand for the interconnected data-center space. Moreover, near-term incremental network demand, stemming from an increase in remote working, is expected to benefit some of its high-margin product lines.

Amid these tailwinds, the company continues to strengthen the interconnection portfolio. In the second quarter, it added an incremental 8000 interconnections. Further, in August, it announced a $161-million acquisition of GPX Global Systems, Inc.’s India operations, GPX India, consisting of two data centers. Moreover, Equinix will open its fourth data center, ML5 IBX, in Italy in first-quarter 2021.

Such expansion efforts are supported by a strong balance sheet. As of Jun 30, 2020, the company had $4.2 billion in available liquidity that is sufficient to meet operating requirements, fund acquisitions and pay dividends. Moreover, its regular utilization of the at-the-market equity program and access to debt market reflect a consistent capital sourcing policy.

Further, shares of this Zacks Rank #3 (Hold) company have gained 14.7% over the past three months against the real estate market’s 0.2% decline.

However, the competitive data-center landscape could prompt competitors to resort to aggressive pricing policies, making Equinix vulnerable to pricing pressure. In fact, in addition to competing with neutral colocation providers, the company competes with traditional colocation providers, Internet service providers and Web-hosting facilities. In view of strong growth potential, competition from the existing and new players in the space is expected to increase.

Equinix plans to add more data centers in the coming quarters to satisfy the growing demand for colocation and interconnection services. Although such a move will be a strategic fit, it requires huge capital outlays and might increase the company’s financial obligations, given its significant debt balance.

Moreover, integration costs related to acquisitions will likely impede bottom-line growth. It anticipates incurring $20 million of integration costs in 2020.

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Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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