5 Reasons That Make Equinix (EQIX) Stock a Solid Portfolio Pick
In a world where digital transformation is paramount, Equinix EQIX continues to prove itself as a pivotal player in the global digital infrastructure landscape.
Analysts also seem bullish on this Zacks Rank #2 (Buy) stock. The estimate revision trend for 2023 and 2024 funds from operations (FFO) per share indicates a favorable outlook for the company, with estimates moving north over the past two months.
Year to date, shares of Equinix have risen 22.8%, outperforming the real estate market’s increase of 7.9%. Given its solid fundamentals and positive estimate revisions, the stock is likely to keep performing well in the quarters ahead.
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What Makes Equinix a Solid Pick?
Solid Market Fundamentals and Recurring Revenues: The need for data center infrastructure has stayed strong due to the expansion of cloud computing, the Internet of Things and Big Data. Additionally, there is increased demand for third-party IT infrastructure. Furthermore, the rise of AI, autonomous vehicles and virtual/augmented reality markets has established a sturdy foundation for data centers.
Amid this, Equinix’s geographically diverse portfolio of IBX data centers is expected to benefit from enterprises’ increasing dependence on technology and the expedited implementation of digital transformation strategies.
Its business generates a substantial portion of recurring revenues (greater than 90% of total revenues in the last three years). The company generated 37% of the recurring revenues from its 50 largest customers during the nine months ended Sep 30, 2023. For the current year, we estimate recurring revenues to increase 13.2% on a year-over-year basis.
Portfolio Strength: Equinix has been achieving continued business momentum with its critical mass of customers and the resultant “network effect” within its IBX centers. Direct interconnection with its networks, connecting the majority of the world’s Internet routes, enables customers to increase the efficiency of their IT infrastructure, remove complexities associated with infrastructure administration and management and reduce costs. Further, the benefits provided by the Platform Equinix have led to a loyal and blue-chip customer base.
Through its 251 IBX data centers, which include 12 xScale data centers and the MC1 data center that are held in unconsolidated joint ventures in 70 metros across 32 countries, customers can directly interconnect critical traffic exchange requirements. These customers rely on Equinix's IBX centers for their critical interconnection relationships.
Expansion Efforts: Equinix continues focusing on acquisitions and developments to expand data center capacity in key markets and strengthen its competitive positioning and global reach. This August, the company announced its fourth IBX data center in Mumbai with an investment of $42 million. The move is aimed at tapping the growing digital market in India. In the third quarter of 2023, it added nine new projects, including new builds in Madrid, Osaka, São Paulo and Silicon Valley.
Moreover, Equinix has an encouraging development pipeline. As of the end of the third quarter of 2023, it had 56 major builds in progress across 39 metros in 23 countries, including 14 xScale builds that are expected to deliver around 100 megawatts of capacity once opened.
Balance Sheet Strength: Encouragingly, Equinix’s robust balance sheet position enables it to capitalize on long-term growth opportunities. As of Sep 30, 2023, the company’s liquidity totaled $6.7 billion. Moreover, it enjoyed 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 third quarter of 2023, rendering it favorable access to the debt market.
Dividend: Solid dividend payouts are arguably the biggest enticements for REIT investors, and Equinix has remained committed to that. EQIX has increased its dividend six times in the last five years, and its five-year annualized dividend growth rate is 8.36%. Given a robust operating platform, healthy financial position, our year-over-year growth projection of 10.5% for 2023 adjusted FFO (AFFO) and a lower dividend payout (compared to its industry), its dividend distribution is expected to be sustainable over the long run.
Other Stocks to Consider
Some other top-ranked stocks from the REIT sector are Lamar Advertising Company LAMR and STAG Industrial, Inc. STAG, each carrying a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Lamar’s current-year FFO per share has been revised 1.7% upward over the past two months to $7.31.
The Zacks Consensus Estimate for STAG Industrial’s 2023 FFO per share has moved 1.3% upward in the past two months to $2.28.
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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