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Is it Wise to Retain Equinix (EQIX) Stock in Your Portfolio?
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Equinix’s (EQIX - Free Report) portfolio is well-poised to benefit from the high demand for inter-connected data center space as enterprises and service providers continue to integrate artificial intelligence (AI) into their strategies and offerings and advance their digital transformation agendas. However, a competitive landscape from carrier-neutral data centers and a debt burden amid a high interest rate environment raise concerns.
What’s Aiding It?
In this increasing total addressable market for data centers, Equinix is expanding its International Business Exchanges (“IBX”) data centers globally and gaining traction among tech companies looking for data management.
It is strengthening its competitive positioning and global reach by focusing on acquisitions and developments. In 2023, the company opened nine new data centers, including xScale data centers, through joint ventures. These efforts have increased Equinix’s total number of IBX data center facilities to 260, including five additional data centers, which opened in January 2024.
EQIX also has an encouraging development pipeline. As of the end of the fourth quarter of 2023, it had 49 major builds underway across 35 markets in 21 countries, including 11 xScale builds representing nearly 20,000 cabinets of retail and more than 50 megawatts of xScale capacity through 2024.
The company has a recurring revenue model, which comprises colocation, related interconnection and managed IT infrastructure services. The company generated 37% of the recurring revenues from its 50 largest customers during the year ended Dec 31, 2023. This ensures a stable cash flow generation for the company and aids top-line growth.
Encouragingly, Equinix’s robust balance sheet position enables it to capitalize on long-term growth opportunities. As of Dec 31, 2023, the company’s liquidity totaled $6.5 billion. Its net leverage ratio was 3.7 and the weighted average maturity was 7.6 years as of the same date.
Solid dividend payouts remain the biggest attraction for REIT investors, and Equinix has remained committed to that. In October 2023, concurrent with its third-quarter 2023 earnings release, the company announced a 25% increase in the dividend to $4.26 per share from $3.41 paid out earlier. Moreover, Equinix has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 9.45%. Such efforts boost investors’ confidence in the stock. Check Equinix’s dividend history here.
Given a robust operating platform, healthy financial position and a lower dividend payout (compared to its industry), its dividend distribution is expected to be sustainable over the long run.
Shares of this Zacks Rank #3 (Hold) company have gained 8.1% over the past three months, outperforming the real estate market’s increase of 0.5%.
Image Source: Zacks Investment Research
What’s Hurting It?
However, considering the strong growth potential of this industry, competition is expected to increase from existing players and the entry of new players into the space. The increased competition is likely to lead to aggressive pricing policies, making Equinix vulnerable to pricing pressure.
Equinix’s significant debt obligations in a high-interest-rate environment are worrisome. Also, high borrowing costs due to high interest rates could affect its ability to purchase or develop real estate.
Image: Bigstock
Is it Wise to Retain Equinix (EQIX) Stock in Your Portfolio?
Equinix’s (EQIX - Free Report) portfolio is well-poised to benefit from the high demand for inter-connected data center space as enterprises and service providers continue to integrate artificial intelligence (AI) into their strategies and offerings and advance their digital transformation agendas. However, a competitive landscape from carrier-neutral data centers and a debt burden amid a high interest rate environment raise concerns.
What’s Aiding It?
In this increasing total addressable market for data centers, Equinix is expanding its International Business Exchanges (“IBX”) data centers globally and gaining traction among tech companies looking for data management.
It is strengthening its competitive positioning and global reach by focusing on acquisitions and developments. In 2023, the company opened nine new data centers, including xScale data centers, through joint ventures. These efforts have increased Equinix’s total number of IBX data center facilities to 260, including five additional data centers, which opened in January 2024.
EQIX also has an encouraging development pipeline. As of the end of the fourth quarter of 2023, it had 49 major builds underway across 35 markets in 21 countries, including 11 xScale builds representing nearly 20,000 cabinets of retail and more than 50 megawatts of xScale capacity through 2024.
The company has a recurring revenue model, which comprises colocation, related interconnection and managed IT infrastructure services. The company generated 37% of the recurring revenues from its 50 largest customers during the year ended Dec 31, 2023. This ensures a stable cash flow generation for the company and aids top-line growth.
Encouragingly, Equinix’s robust balance sheet position enables it to capitalize on long-term growth opportunities. As of Dec 31, 2023, the company’s liquidity totaled $6.5 billion. Its net leverage ratio was 3.7 and the weighted average maturity was 7.6 years as of the same date.
Solid dividend payouts remain the biggest attraction for REIT investors, and Equinix has remained committed to that. In October 2023, concurrent with its third-quarter 2023 earnings release, the company announced a 25% increase in the dividend to $4.26 per share from $3.41 paid out earlier. Moreover, Equinix has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 9.45%. Such efforts boost investors’ confidence in the stock. Check Equinix’s dividend history here.
Given a robust operating platform, healthy financial position and a lower dividend payout (compared to its industry), its dividend distribution is expected to be sustainable over the long run.
Shares of this Zacks Rank #3 (Hold) company have gained 8.1% over the past three months, outperforming the real estate market’s increase of 0.5%.
Image Source: Zacks Investment Research
What’s Hurting It?
However, considering the strong growth potential of this industry, competition is expected to increase from existing players and the entry of new players into the space. The increased competition is likely to lead to aggressive pricing policies, making Equinix vulnerable to pricing pressure.
Equinix’s significant debt obligations in a high-interest-rate environment are worrisome. Also, high borrowing costs due to high interest rates could affect its ability to purchase or develop real estate.
Stocks to Consider
Some better-ranked stocks from the REIT sector are American Tower (AMT - Free Report) and SL Green Realty (SLG - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for AMT’s 2024 funds from operations (FFO) per share is pegged at $10.27, suggesting year-over-year growth of 4.1%.
The Zacks Consensus Estimate for SLG’s 2024 FFO per share stands at $5.88, indicating an increase of 19% from the year-ago reported figure.
Note: Anything related to earnings presented in this write-up represents FFO, a widely used metric to gauge the performance of REITs.