{"id":34857,"date":"2023-07-12T20:57:49","date_gmt":"2023-07-13T00:57:49","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/equinix-take-advantage-of-the-ai-trend-nasdaqeqix\/"},"modified":"2023-07-12T20:57:52","modified_gmt":"2023-07-13T00:57:52","slug":"equinix-take-advantage-of-the-ai-trend-nasdaqeqix","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=34857","title":{"rendered":"Equinix: Take Advantage Of The AI Trend (NASDAQ:EQIX)"},"content":{"rendered":"
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One of the main headlines lately has been the AI boom, which has driven tech valuations to very high levels. I have written a couple of bearish articles on tech stocks which I believe have become quite overvalued. But that doesn\u2019t mean that I\u2019m ignoring the AI trend altogether. I\u2019m still interested in buying companies whose growth will be fueled by this new technology, I\u2019m just not willing to pay premium valuations.<\/span><\/p>\n

In my opinion, this is where data centers come into it. Data centers play a crucial part in the AI ecosystem because they provide the infrastructure that software companies can use to run their code. I\u2019ve already covered a major data center player Digital Realty Trust (DLR) in my article here. Today I want to expand my coverage by another data center REIT \u2013 Equinix (NASDAQ:EQIX<\/span>).<\/span><\/p>\n

The sector is expected to experience major headwinds over the next 5-7 years with demand expected to grow by a CAGR of 13% per year. That\u2019s really high growth and one that will compound over time and likely deliver solid earnings growth for any major player in the sector.<\/p>\n

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EQIX<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

With such promising industry outlook, it\u2019s important to make sure we don\u2019t overpay for the growth. After all, no sector or company is worth buying at any price. With that in mind, let\u2019s have a look at Equinix.<\/p>\n

Company Overview<\/h2>\n

Equinix is a global data center player which operates almost 250 major data centers in 32 countries and on 6 continents. Of these, 138 are owned by EQIX outright, while the rest are managed by third parties. Notably, 63% of revenues are generated by owned assets.<\/p>\n

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EQIX<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

A lot of tenants are some of the world\u2019s largest tech firms, such as Amazon (AMZN) or Meta (META). This means that the REIT doesn\u2019t have to worry about the solvency of its tenants too much as it\u2019s very likely that these large firms will be able to pay their rent. Moreover, the occupancy is bound to be very stable with very high lease terms \u2013 over 18 years on average and 70% of leases expiring after 2037.<\/p>\n

The one area where the REIT falls a bit short is tenant diversification. Because of the nature of the business, the top 10 tenants account for almost 20% of total revenue, which makes a potential default of any one tenant a significant event for the REIT. On the flip side, churn has historically been pretty low at around 2% per quarter. This is because data migration tends to be quite expensive and is not worth it for most tenants as long as Equinix keeps their properties up to date.<\/p>\n

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EQIX<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

The company has a very good track record of growth with 22 years of consecutive revenue growth. Most recently, during the first quarter, same store revenue increased by 11% YoY. For the full 2023 the expectation is for revenues to increase by up to 15% YoY and AFFO to reach $31-32 per share.<\/p>\n

In the meantime, the REIT maintains a very good investment grade BBB+ rated balance sheet with an incredibly low cost of debt (2.14%), thanks to their overseas exposure and a long weighted average maturity of 8.4 years. With 96% of all debt fixed rate and reasonable debt maturities of about $1 billion in 2024-2025 there is little refinancing or interest rate risk to consider.<\/p>\n

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EQIX<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Before we get to valuation, I want to touch on the company\u2019s dividends. Again, there\u2019s a clear track record of growth with 8 consecutive years of growth. For this year, the dividend is expected to increase by 12% YoY to $13.64 per share which represents a yield of 1.7%. Not the highest by any measure, but very safe as the payout ratio stands below 50%. This means that the REIT will most likely be able to maintain dividend growth at least equal to FFO growth going forward.<\/p>\n

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EQIX<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Valuation<\/h2>\n

We started this article by saying that no company is worth buying at any price. Equinix sure is a healthy and attractive company in a very promising sector, but how expensive is it?<\/p>\n

Currently, the stock trades at 25x FFO which is basically on par with its historical average multiple. For comparison DLR trades at 17x FFO, but I do think that EQIX deserves a premium because of its longer history, longer lease terms, and a superior balance sheet. For this reason, I wouldn\u2019t give too much weight to the peer comparison and will rather focus on the history.<\/p>\n

It’s hard to forecast multiple expansion from an already high multiple of 25x, but with strong underlying growth, FFO is expected to be $37 per share by 2025. If by then, the market continues to value EQIX at 25x FFO, the price target would be $925 per share, up nearly 20% from today on top of the dividend.<\/p>\n

While a 20-25% over two and a half years isn\u2019t spectacular, I think it deserves a BUY rating, especially when we consider that the AI trend is still just getting started and we don\u2019t really know how far it will go. There is certainly potential upside beyond my forecast if AI becomes the norm.<\/p>\n

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<\/span>FAST Graphs<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

To conclude, I want to touch on one risk that could potentially jeopardize the investment. Data centers are very capital intensive and require very high maintenance costs. It seems that the rate of change in technology is only accelerating which means that data centers will have to incur more and more costs to make sure their servers are up to date so that they can retain tenants. This could pressure margins. To date, there has been no indication of margins narrowing, but bear in mind that this could change.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

One of the main headlines lately has been the AI boom, which has driven tech valuations to very high levels. I have written a couple of bearish articles on tech stocks which I believe have become quite overvalued. But that doesn\u2019t mean that I\u2019m ignoring the AI trend altogether. I\u2019m still interested in buying companies […]<\/p>\n","protected":false},"author":1,"featured_media":34858,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-34857","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-news","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nEquinix: Take Advantage Of The AI Trend (NASDAQ:EQIX) | iFintechWorld<\/title>\n<meta name=\"description\" content=\"One of the main headlines lately has been the AI boom, which has driven tech valuations to very high levels. 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