Stock of the Week: Equinix (07.11.2024)

13:59 7 November 2024

Equinix (EQIX.US), the world's largest data center REIT, has demonstrated strong fundamental performance in Q3 2024, highlighted by record gross bookings and strategic expansion of its xScale platform. The company's position as a critical infrastructure provider for digital transformation continues to strengthen, particularly as AI workloads drive increased demand for high-density deployments.

Q3 2024 Results vs Estimates

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  • Revenue: $2.20 billion vs estimate $2.2 billion
  • Adjusted EBITDA: $1.05 billion vs estimate $1.04 billion
  • EBITDA margin: 48% vs estimate 47.2%
 

 

Overview of Q3 Performance 

Equinix delivered its 86th consecutive quarter of revenue growth, showcasing the company's consistent execution and strong market position. Notable achievements include record gross bookings with megawatts (MW) sold up 60% quarter-over-quarter, and new cabinet deployments featuring 55% higher power density compared to churned cabinets (6.2kW vs. 4kW). The company added 3,100 billable cabinets in Q3, representing a 1.7% year-over-year growth after declines in the first half of 2024.

xScale and Strategic Growth 

The company announced a significant expansion of its xScale program through a new $15 billion joint venture in the United States. This partnership with GIC and Canada Pension Plan will nearly triple the investment capital of the Equinix xScale program, enabling the development of more than 15 new xScale deployments in the Americas. The company has already leased 20 MW of xScale capacity since its last earnings call, bringing total leased capacity to 385 MW across opened and under-development facilities.

Regional Performance

  • Americas: Showed slower colocation revenue growth but expects improvement as recent bookings begin billing
  • EMEA: Demonstrated better-than-expected results despite market challenges
  • APAC: Benefited from $51 million in non-recurring xScale revenue

Development Pipeline
Equinix maintains an aggressive development strategy across all regions:

  • Americas: 12,300 cabinet builds planned for 2025 and 7,875 for 2026 ($2.114B total capex)
  • EMEA: 5,975 cabinet builds for 2025, 2,275 for 2026, and 2,550 thereafter ($1.231B)
  • APAC: 2,925 cabinet builds for 2025, 1,550 for 2026, and 1,100 for 2027 ($510M)

2024 Full-Year Guidance

  • Revenue: $8.748-8.788 billion (7% year-over-year growth)
  • Adjusted EBITDA: $4.09-4.13 billion
  • AFFO per share: $34.81-35.22
  • Recurring capex: $230-250 million
  • Non-recurring capex: $2.62-2.85 billion (including $90M xScale)

Strategic Focus Areas

1. Enhanced customer engagement for critical infrastructure workloads
Equinix is deepening relationships with existing enterprise customers to become their primary infrastructure partner. This includes developing specialized solutions for AI and high-performance computing workloads, while strengthening partnerships with major cloud providers to facilitate hybrid and multi-cloud deployments. The company has implemented dedicated customer success teams for large enterprise accounts to ensure seamless service delivery and support.

 
 

Source: Equinix Q3 24 Investor Presentation

 

2. Smart solution delivery for easier customer deployment

The company is introducing automated provisioning systems to reduce deployment times and expanding the Equinix Fabric platform to enable seamless cross-region connectivity. This initiative includes developing standardized deployment templates for common customer configurations and implementing AI-driven optimization tools for power and cooling management. Equinix is also rolling out enhanced digital experience platforms for customer service and support to streamline operations.

3. Transition from smaller builds to larger developments with robust power access
Equinix is strategically focusing on land acquisitions in power-rich markets and developing campus-style facilities to achieve economies of scale. The company is implementing modular design approaches for faster deployment and scaling, while securing long-term power purchase agreements to ensure capacity for future growth. There is also a clear prioritization of developments in regions with access to renewable energy sources to support sustainability goals.

 

Source: Equinix Q3 24 Investor Presentation

 

Risks and Challenges
 

  1. Core business growth at 10-year low when excluding xScale and IBX expansion
    Traditional colocation revenue growth is showing signs of maturation, with increased pressure on pricing in competitive markets. The company faces the ongoing challenge of balancing its traditional business with emerging opportunities while maintaining market leadership through continued innovation.
  2. Elevated churn levels (2.0-2.5% expected range)
    Customer optimization efforts are leading to increased turnover, with some large customers consolidating their deployments. The company is experiencing competitive pressure in key markets affecting retention rates, necessitating enhanced customer retention strategies and value proposition development.
  3. Currency headwinds affecting financial performance
    Significant exposure to international markets is creating volatility in financial results, impacting reported performance despite strong underlying fundamentals. The company continues to implement hedging strategies, though long-term investment returns may be affected by persistent currency fluctuations.
  4. Competitive pressure in emerging markets from local operators
    Strong government support for domestic providers in key growth markets presents a significant challenge. Local operators maintain advantages in navigating regulatory environments and leveraging established regional relationships. Equinix needs to develop strategic partnerships to effectively penetrate new markets and compete with entrenched local players.
  5. Extended timeline for xScale returns (potential 2028 materialization)
    The xScale initiative requires significant upfront capital investment and faces complex power and site acquisition processes. Extended construction and deployment timelines necessitate careful capital allocation to maintain current returns while investing for future growth. There are also risks associated with market conditions potentially changing before facilities become operational, affecting projected returns.
 

Investment Outlook
Equinix's strategic positioning in the data center market, coupled with its successful execution of the xScale program and strong booking momentum, suggests continued growth potential. The company's focus on high-density deployments and larger footprint opportunities (250kW-1MW+) positions it well to capture increasing demand from AI and cloud workloads. While near-term growth may be moderated by optimization churn and currency headwinds, the long-term thesis remains strong with expected 8-10% revenue growth and continued margin expansion opportunities.

 

 

Valuation

We based our projections on historical averages and company projections. This results in an 10% revenue growth and a 20% operating margin across the 5-year forecast. Considering the substantial influence of terminal value in DCF analysis, especially for shorter forecast periods, we’ve applied a conservative 5% revenue growth and a reduced 7.5% terminal WACC (down from the 8% used in forecast years).

Under these assumptions, our model suggests an intrinsic value of $525.16 per share, indicating a significant downside relative to the current market price. It’s important to note the high sensitivity of DCF-derived intrinsic values to input assumptions. Below, two sensitivity matrices illustrate different Operating Margin and Revenue Growth scenarios, as well as Terminal WACC and Terminal Revenue Growth variations.

 

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

 

To assess Equinix's performance relative to its peers, we've created a peer group of three companies with similar business models: Prologis, American Tower Corporation, and Welltower. Equinix stands above the peer group average across several key metrics, as indicated by the mean, median, and cap-weighted multiples we calculated.

Three separate valuations for Equinix, based on these multiples, show mixed results. While the P/E and forward P/E ratios suggest the stock might be overvalued, the P/S and EV/Sales ratios indicate potential upside. This combination of metrics suggests Equinix could present an attractive opportunity compared to its peers, depending on the valuation approach.

Source: Bloomberg Finance LP, XTB Research

 

 

Recommendations: Equinix has 32 recommendations, with 26 "buy" and highest price of $1085 and 6 “hold” with lowest price of $758. The 12-month average stock price forecast is $964.81, implying an 8.3% upside potential from the current price.

 

Technical analysis: 

The price is currently trading between the 23.6% Fibonacci retracement level, acting as resistance, and the 38.2% Fibonacci retracement level as support. Additional support may be provided by the 50-day SMA at $873.55. The stock may be forming a bull flag, which would be confirmed by a breakout above the recent high of $941.79. However, the RSI indicates bearish divergence, and the MACD has issued a sell signal.

 

 

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This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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