Here's Why You Should Buy Equinix (EQIX) Stock for Now
Equinix’s EQIX global data center portfolio is well-poised to benefit from the high demand for 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 with infrastructure that is more distributed, cloud-connected and ecosystem enabled.
In this increasing total addressable market for data centers, Equinix is expanding its International Business Exchanges (“IBX”) data centers globally and gaining traction among tech companies looking for data management. It is strengthening its competitive positioning and global reach by focusing on acquisitions and developments. In the third quarter of 2023, it added nine new projects, including new builds in Madrid, Osaka, São Paulo and Silicon Valley.
EQIX also 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.
The company has a recurring revenue model, which comprises colocation, related interconnection and managed IT infrastructure services. This ensures a stable cash flow generation for the company and aids top-line growth. For the current year, we estimate recurring revenues to increase 13.2% on a year-over-year basis.
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. Its net leverage ratio was 3.5, and the weighted average maturity was 7.8 years as of the same date.
Solid dividend payouts remain the biggest attraction for REIT investors, and Equinix has remained committed to that. In October 2023, concurrent with its third-quarter 2023 earnings release, the company announced a 25% increase in the dividend to $4.26 per share from $3.41 paid out earlier. Moreover, Equinix has increased its dividend six times in the last five years, and its five-year annualized dividend growth rate is 8.36%. Check Equinix’s dividend history here.
Given a robust operating platform, healthy financial position, our year-over-year growth projection of 10.8% for 2023 adjusted funds from operations (FFO) and a lower dividend payout (compared to its industry), its dividend distribution is expected to be sustainable over the long run.
Shares of this Zacks Rank #2 (Buy) company have risen 9.7% so far in the quarter, outperforming the real estate market’s increase of 5.2%.
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However, 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.
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 6.5% in the company’s current-year interest expenses.
Other Stocks to Consider
Some other top-ranked stocks from the REIT sector are Iron Mountain IRM and STAG Industrial, Inc. STAG, 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 Iron Mountain’s current-year funds from operations (FFO) per share has moved marginally northward over the past three months to $3.97.
The Zacks Consensus Estimate for STAG Industrial’s 2023 FFO per share has moved 1.3% upward in the past month to $2.28.
Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.
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