Shares of Equinix, Inc. (EQIX Quick QuoteEQIX – Free Report) have gained 16.8% in the past six months compared with the real estate market’s growth of 1.4%.
The robust demand for data center infrastructure amid enterprises’ growing reliance on technology and acceleration in digital transformation strategies has aided this Zacks Rank #2 (Buy) company in the recent past. Its strategic expansion efforts, backed by a robust balance sheet, have enabled it to capitalize on favorable industry trends so far.
Last month, this global digital infrastructure company reported third-quarter 2023 adjusted funds from operations (“AFFO”) of $8.19 per share, surpassing the Zacks Consensus Estimate of $7.79. The figure improved nearly 6% from the prior-year quarter. Its quarterly results reflected steady growth in colocation and inter-connection revenues.
Let us now find out the factors behind the surge in the stock price and check whether this trend will last.
The demand for high-performing data centers has remained robust for quite some time now, owing to the continued strength in enterprises’ cloud adoption and customers’ digital demand. Specifically, the rise in mobile data usage, artificial intelligence (AI), Internet of Things, edge computing and 5G technology might have accelerated the need for digital infrastructure globally. This has created a solid base for data centers.
Amid this, Equinix’s geographically diverse portfolio of International Business Exchanges (“IBX”) data centers is expected to have benefited from the continued efforts of enterprises and service providers to integrate AI into their strategies and offerings.
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. In the third quarter, recurring revenues were $1.96 billion, rising 12.2% from the year-ago quarter.
Revenues from the Americas, EMEA and the Asia Pacific rose 7.9%, 19.8% and 8.9%, respectively, to $913.7 million, $708.7 million and $438.6 million, year over year, respectively.
Given that the demand for high-performing data centers is expected to escalate in the coming years with the exponential rise in data traffic, Equinix is likely to continue witnessing healthy cash flow growth.
EQIX is also focusing on amplifying its global footprint by expanding its IBX data centers to meet the global need for data centers. In the third quarter, it added nine new projects, including new builds in Madrid, Osaka, São Paulo and Silicon Valley.
In September 2023, the company 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 submarine cable system. The 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.
Encouragingly, EQIX currently has 56 major projects underway across 39 markets in 23 countries, including 14 xScale builds that are expected to deliver more than 100 megawatts of capacity once opened.
Equinix’s robust balance sheet position has enabled it to capitalize on long-term growth opportunities. It had $6.7 billion of liquidity as of Sep 30, 2023. Its net leverage ratio was 3.5, and the weighted average maturity was 7.8 years as of the same date.
The data center real estate investment trust (“REIT”) enjoys investment-grade credit ratings of Baa2 from Moody’s, BBB rating from S&P Global Ratings and BBB+ from Fitch Ratings, rendering it favorable access to the debt market.
Solid dividends are a massive attraction for REIT investors and EQIX has remained committed to that, even during the pandemic. In October 2023, concurrent with third-quarter 2023 earnings release, Equinix’s board of directors announced a 25% hike in its quarterly cash dividend to $4.26 per share from $3.41 paid out earlier. The company has increased its dividend six times in the last five years and its five-year annualized dividend growth rate is 8.36%. Such efforts boost investors’ confidence in the stock. Check Equinix’s dividend history here.
Equinix, expecting to benefit from a thriving data center market, raised its guidance for 2023 AFFO per share to $31.87-$32.19 from $31.51-$32.15, guided earlier. This suggests an 8-9% increase from the previous year.
Analysts, too, seem bullish on the company. The Zacks Consensus Estimate for the company’s current-year FFO per share has been raised marginally in the past month to $32.06, indicating a favorable outlook.