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Is it Wise to Retain Equinix Stock in Your Portfolio Now?
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Equinix’s (EQIX - Free Report) portfolio is well-poised to benefit from the high demand for the 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 still elevated interest rate environment raise concerns.
What’s Aiding Equinix?
There is growing reliance on technology and acceleration in digital transformation strategies by enterprises that call for data exchanges. To meet this global need, Equinix is expanding its International Business Exchanges (“IBX”) data centers globally and is gaining traction among tech companies looking for data management. Demand for high-performing data centers will escalate in the years to come with the exponential rise in data traffic. This will require enterprises to engage data-center service providers such as Equinix. Increasing the total addressable market for data centers provides an immense growth opportunity for Equinix. Management expects total revenues to increase 6-7% in 2024 on a year-over-year basis.
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 264 as of June 30, 2024. Moreover, Equinix has an encouraging development pipeline. As of the end of the second quarter of 2024, it had 54 major builds underway across 36 markets in 24 countries, including 15 xScale builds representing more than 11,000 cabinets of retail capacity and more than 30 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 36% of recurring revenues from its 50 largest customers in the three months ended June 30, 2024. This ensures a stable cash flow generation for the company and aids top-line growth.
Equinix’s robust balance sheet position enables it to capitalize on long-term growth opportunities. As of June 30, 2024, the company’s liquidity totaled $6.4 billion. It enjoys investment-grade credit ratings of Baa2 from Moody’s, BBB rating from S&P Global Ratings and BBB+ from Fitch Ratings as of the end of the second quarter of 2024, rendering it favorable access to the debt market.
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 12.02%. Such efforts boost investors’ confidence in the stock. Given a robust operating platform, our year-over-year growth projection of 10.8% for 2024 adjusted funds from operations (AFFO), healthy financial position and a lower dividend payout (compared to its industry), its dividend distribution is expected to be sustainable over the long run.
What’s Hurting Equinix?
However, Equinix competes with data centers operated by established communications carriers as well as REITs, including Digital Realty Trust (DLR - Free Report) and Iron Mountain Incorporated (IRM - Free Report) . 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.
Moreover, a still 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 June 30, 2024, Equinix’s total debt principal outstanding was nearly $16.68 billion. Our estimate indicates a year-over-year increase of 8.2% in the company’s 2024 interest expenses.
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 Stock in Your Portfolio Now?
Equinix’s (EQIX - Free Report) portfolio is well-poised to benefit from the high demand for the 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 still elevated interest rate environment raise concerns.
What’s Aiding Equinix?
There is growing reliance on technology and acceleration in digital transformation strategies by enterprises that call for data exchanges. To meet this global need, Equinix is expanding its International Business Exchanges (“IBX”) data centers globally and is gaining traction among tech companies looking for data management. Demand for high-performing data centers will escalate in the years to come with the exponential rise in data traffic. This will require enterprises to engage data-center service providers such as Equinix. Increasing the total addressable market for data centers provides an immense growth opportunity for Equinix. Management expects total revenues to increase 6-7% in 2024 on a year-over-year basis.
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 264 as of June 30, 2024. Moreover, Equinix has an encouraging development pipeline. As of the end of the second quarter of 2024, it had 54 major builds underway across 36 markets in 24 countries, including 15 xScale builds representing more than 11,000 cabinets of retail capacity and more than 30 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 36% of recurring revenues from its 50 largest customers in the three months ended June 30, 2024. This ensures a stable cash flow generation for the company and aids top-line growth.
Equinix’s robust balance sheet position enables it to capitalize on long-term growth opportunities. As of June 30, 2024, the company’s liquidity totaled $6.4 billion. It enjoys investment-grade credit ratings of Baa2 from Moody’s, BBB rating from S&P Global Ratings and BBB+ from Fitch Ratings as of the end of the second quarter of 2024, rendering it favorable access to the debt market.
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 12.02%. Such efforts boost investors’ confidence in the stock. Given a robust operating platform, our year-over-year growth projection of 10.8% for 2024 adjusted funds from operations (AFFO), healthy financial position and a lower dividend payout (compared to its industry), its dividend distribution is expected to be sustainable over the long run.
What’s Hurting Equinix?
However, Equinix competes with data centers operated by established communications carriers as well as REITs, including Digital Realty Trust (DLR - Free Report) and Iron Mountain Incorporated (IRM - Free Report) . 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.
Moreover, a still 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 June 30, 2024, Equinix’s total debt principal outstanding was nearly $16.68 billion. Our estimate indicates a year-over-year increase of 8.2% in the company’s 2024 interest expenses.
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.