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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. Equinix’s total number of IBX data center facilities reached 260 as of Mar 31, 2024.

Moreover, Equinix has an encouraging development pipeline. As of the end of the first quarter of 2024, it had 50 major builds underway across 34 markets in 21 countries, including 14 xScale builds representing more than 16,000 cabinets of retail capacity and more than 50 megawatts of xScale capacity through the end of 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 three months ended Mar 31, 2024. 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 Mar 31, 2024, the company’s liquidity totaled $5.9 billion. Its net leverage ratio was 3.6, and the weighted average maturity was 7.3 years as of Mar 31, 2024.

Solid dividend payouts remain the biggest attraction for REIT investors, and Equinix has remained committed to that. The company 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 10.6% for 2024 adjusted funds from operations (AFFO), a healthy financial position and a lower dividend payout (compared to its industry), EQIX’s dividend distribution is expected to be sustainable over the long run.

Although shares of this Zacks Rank #3 (Hold) company have declined 6.5% over the past six months, the decrease is narrower than the real estate market’s fall of 6.9%. Analysts seem bullish on EQIX, with the Zacks Consensus Estimate for 2024 funds from operations (FFO) per share being revised seven cents upward over the past two months to $34.97.

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What’s Hurting Equinix?

However, Equinix competes with Internet data centers operated by established communications carriers as well as REITs, including Digital Realty Trust (DLR). 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 Mar 31, 2024, Equinix’s total debt principal outstanding was nearly $15.97 billion. Our estimate indicates a year-over-year increase of 5.2% in the company’s 2024 interest expenses.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Lamar Advertising (LAMR - Free Report) and Americold Realty Trust, Inc. (COLD - 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 Lamar Advertising’s 2024 FFO per share of $8.03 indicates a 7.5% increase year over year.    

The Zacks Consensus Estimate for Americold’s 2024 FFO per share is pegged at $1.44, which suggests 13.4% year-over-year growth.

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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