Shares of Equinix EQIX, carrying a Zacks Rank #3 (Hold) currently, have risen 10.1% year to date against the real estate market’s fall of 8.6%.
In a world where digital transformation is paramount, Equinix has once again proven itself as a pivotal player in the global digital infrastructure landscape. The company recently announced an expanded partnership with Southern Cross Cables Limited to serve as a vital U.S.-based interconnectivity access point for the Southern Cross NEXT (“SX NEXT”) submarine cable system.
This development is set to redefine digital connectivity among Australia, New Zealand and the United States while addressing the growing demand for low-latency, high-capacity subsea cables.
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Let us now decipher the factors behind the surge in the stock price and also check whether this trend will last.
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 International Business Exchanges (“IBX”) data centers is expected to benefit from enterprises’ increasing dependence on technology and the expedited implementation of digital transformation strategies.
The company has a recurring revenue model comprising colocation, related interconnection and managed IT infrastructure services. This assures stable cash flow generation. Over the last three years, more than 90% of the total revenues were recurring in nature. EQIX generated 37% of recurring revenues from its 50 largest customers during the six months ended Jun 30, 2023. For the current year, we estimate recurring revenues to increase 13.4% on a year-over-year basis.
Equinix has been focusing on the expansion of data center capacity in key markets and strengthening its competitive positioning and global reach. In 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 second quarter of 2023, Equinix added 12 new projects, including new IBX data center builds in Lisbon, Monterrey and Mumbai. Moreover, Equinix has an encouraging development pipeline, which bodes well for its long-term growth. As of the end of the second quarter of 2023, it had 53 major projects in progress across 40 metros in 24 countries, including 11 xScale builds that are expected to deliver around 90 megawatts of capacity once opened.
With an impressive footprint of 250 IBX and xScale data centers in 71 global markets across 32 countries, Equinix is well-poised to benefit from the high demand for inter-connected data center space amid rising enterprise cloud adoption and customers’ digital demand.
Encouragingly, Equinix’s robust balance sheet position has enabled it to capitalize on long-term growth opportunities. It had $6.5 billion of available liquidity as of Jun 30, 2023. Its net leverage ratio was 3.6, and the weighted average maturity was 8.1 years as of Jun 30, 2023.
Solid dividends are a huge attraction for REIT investors, and EQIX has remained committed to that. It has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 8.40%. Such efforts boost investors’ confidence in the stock. Check Equinix’s dividend history here.
However, considering the strong growth potential of this industry, competition is expected to increase from existing players and the entry of new players into the space, resulting in aggressive pricing policies.
Equinix’s significant debt obligations in a high-interest-rate environment are worrisome. Also, high borrowing costs due to high interest rates could affect its ability to purchase or develop real estate. Our estimate indicates a year-over-year increase of 9.3% in interest expenses in the current year.
Stocks to Consider
Some better-ranked stocks from the REIT sector are SBA Communications SBAC and Americold Realty Trust COLD, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved marginally northward over the past month to $12.90.
The Zacks Consensus Estimate for Americold Realty Trust’s ongoing year’s FFO per share has been raised 2.4% upward over the past month to $1.26.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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