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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 in a high interest rate environment raise concerns.
What’s Aiding Equinix?
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.
EQIX 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. Equinix 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 10.66%. Such efforts boost investors’ confidence in the stock. Check Equinix’s dividend history here.
Given a robust operating platform, our year-over-year growth projection of 11.2% for 2024 AFFO, a healthy financial position and a lower dividend payout (compared to its industry), Equinix’s dividend distribution is expected to be sustainable over the long run.
Shares of this Zacks Rank #3 (Hold) company have risen 9.2% over the past year, while the real estate market edged down 0.6%.
Image Source: Zacks Investment Research
What’s Hurting Equinix?
However, Equinix competes with Internet data centers operated by established communications carriers as well as REITs, including Digital Realty Trust. In addition to competing with neutral colocation providers, the company competes with traditional colocation providers, Internet service providers and Web-hosting facilities.
Considering the strong growth potential, 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.
Further, a high interest rate environment in the near term will lead to high borrowing costs for the company, affecting its ability to purchase or develop real estate. As of Dec 31, 2023, Equinix’s total debt principal outstanding was nearly $16.10 billion.
Our estimate indicates a year-over-year increase of 18.6% in the company’s 2024 interest expenses. Also, with high interest rates still in place, the dividend payout might seem to be less attractive than the yields on fixed-income and money market accounts.
The Zacks Consensus Estimate for HST’s 2024 FFO per share is pegged at $1.97, which suggests year-over-year growth of 2.6%.
The Zacks Consensus Estimate for IRM’s 2024 FFO per share stands at $4.42, which indicates an increase of 7.3% from the year-ago quarter.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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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 in a high interest rate environment raise concerns.
What’s Aiding Equinix?
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.
EQIX 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. Equinix 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 10.66%. Such efforts boost investors’ confidence in the stock. Check Equinix’s dividend history here.
Given a robust operating platform, our year-over-year growth projection of 11.2% for 2024 AFFO, a healthy financial position and a lower dividend payout (compared to its industry), Equinix’s dividend distribution is expected to be sustainable over the long run.
Shares of this Zacks Rank #3 (Hold) company have risen 9.2% over the past year, while the real estate market edged down 0.6%.
Image Source: Zacks Investment Research
What’s Hurting Equinix?
However, Equinix competes with Internet data centers operated by established communications carriers as well as REITs, including Digital Realty Trust. In addition to competing with neutral colocation providers, the company competes with traditional colocation providers, Internet service providers and Web-hosting facilities.
Considering the strong growth potential, 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.
Further, a high interest rate environment in the near term will lead to high borrowing costs for the company, affecting its ability to purchase or develop real estate. As of Dec 31, 2023, Equinix’s total debt principal outstanding was nearly $16.10 billion.
Our estimate indicates a year-over-year increase of 18.6% in the company’s 2024 interest expenses. Also, with high interest rates still in place, the dividend payout might seem to be less attractive than the yields on fixed-income and money market accounts.
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Host Hotels & Resorts (HST - Free Report) and Iron Mountain (IRM - Free Report) , each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for HST’s 2024 FFO per share is pegged at $1.97, which suggests year-over-year growth of 2.6%.
The Zacks Consensus Estimate for IRM’s 2024 FFO per share stands at $4.42, which indicates an increase of 7.3% from the year-ago quarter.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.