Equinix Positive on Data Center, REIT Focus; Risks Remain

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On Jul 25, 2014, we issued an updated research report on Equinix Inc. (EQIX). The company provides network-neutral data centers and Internet exchange services for enterprises, content companies, systems integrators and network service providers.

The growing demand for Big Data exchanges requires greater usage of data centers. To meet this demand, Equinix is expanding its IBX data centers globally and becoming popular among tech companies looking for data management. Thus, the company expects its total addressable market for retail data centers to increase at a CAGR of 8.0% from 2013 to 2017 and reach $24.0 billion. Based on this projection, the company expects its revenues to increase at the rate of 10.0% through 2017.

Moreover, Equinix could benefit from favorable operating leverage. Its business generates a substantial portion of recurring revenues (95.0% of total revenue). As a majority of the cost structures are of a fixed nature, every unit growth in revenues would result in lower expenses as a percentage of total revenue. Higher revenues along with lower costs will expand margins and increase profitability over the long run.

We believe that Equinix’s decision to register itself as a REIT company will prove beneficial. Equinix’s board of directors has approved the conversion and it is in the process of seeking a private letter ruling (PLR.V) from the Internal Revenue Service (IRS). The tax benefit achieved from the REIT status will allow Equinix to distribute a significant portion of its profit as dividends, which will lead to enhancement of shareholder value.

Nonetheless, Equinix competes with Internet data centers operated by established communications carriers such as AT&T (T), Level 3 Communications (LVLT), COLT, Verizon (VZ) and NTT among others, as well as REITs such as Digital Realty Trust and DuPont Fabros. In addition to competing with neutral co-location providers, the company competes with traditional co-location providers, Internet service providers and Web-hosting facility providers.

Moreover, setting up data centers requires huge capital outlays and Equinix plans to add more data centers in the coming quarters to satisfy the growing demand for co-location and interconnection services. Apart from this, the company expects more cash outlays in relation to the REIT conversion.

Last but not least, the telecommunications industry is currently undergoing consolidation. As customers combine businesses, they may require less co-location space, and there may be fewer networks available to choose from. In addition, increased utilization of existing co-location space could reduce the attractive expansion opportunities available to Equinix.

Currently, Equinix has a Zacks Rank #2 (Buy).

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