Shares of Equinix Inc. EQIX have been rallying ever since the company reported its first-quarter 2016 results on May 4. Since then, the stock has gained over 10% and eventually touched a new 52-week high of $368.69 on May 27.
Though the company’s bottom-line results fell short of the Zacks Consensus Estimate, a robust top line and an upbeat guidance for the full year instill investor confidence in the stock.
Equinix’s first-quarter revenues not only surpassed the Zacks Consensus Estimate but also increased over 31% from the year-ago quarter. The improvement was driven mainly by strong bookings activity, net positive pricing actions, and the Telecity and Bit-isle acquisitions.
However, the company’s adjusted funds from operations (AFFO) missed the Zacks Consensus Estimate and witnessed a year-over-year decline. Earnings were weak mainly due to a rise in operating expenses and a higher share count, which more than offset the benefit from strong top-line growth.
Nevertheless, Equinix expects the recently completed acquisitions to drive the top and the bottom line. This has led the company to raise its full-year guidance for both earnings and revenues.
Meanwhile, the share price appreciation can be attributed to the company’s aggressive efforts on developing data centers across different geographies. Keeping up with last year’s initiatives, the company has announced an aggressive expansion plan for 2016 as well.
This plan targets an investment of over $4.5 billion this year in data center openings, expansion of colocation space, and acquisitions. It includes $3.8 billion for the Telecity acquisition, which was completed this January.
Expansion in important markets and consolidation of facilities in the existing ones are an important aspect of Equinix's core strategy. The company strives to enhance its revenue base and improve profitability by offering upgraded technology to attract clients. Moreover, a recurring revenue model has provided much needed support to the company's revenue stream over the years. The company's cloud and IT service businesses are its fastest growing segments and account for roughly one-fourth of its total revenue.
However, intensifying competition from established Internet data center operators such as AT&T T and CenturyLink Inc. CTL may hurt product pricing, thereby denting Equinix’s margins.
The company’s European exposure, highly leveraged balance sheet and industry consolidation further add to its woes.
Equinix currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the technology sector is Saul Centers Inc. BFS, carrying a Zacks Rank #2 (Buy).
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