On Jul 25, 2014, we issued an updated research report on
). The company provides network-neutral data centers and Internet
exchange services for enterprises, content companies, systems
integrators and network service providers.
The growing demand for Big Data exchanges requires greater usage
of data centers. To meet this demand, Equinix is expanding its IBX
data centers globally and becoming popular among tech companies
looking for data management. Thus, the company expects its total
addressable market for retail data centers to increase at a CAGR of
8.0% from 2013 to 2017 and reach $24.0 billion. Based on this
projection, the company expects its revenues to increase at the
rate of 10.0% through 2017.
Moreover, Equinix could benefit from favorable operating
leverage. Its business generates a substantial portion of recurring
revenues (95.0% of total revenue). As a majority of the cost
structures are of a fixed nature, every unit growth in revenues
would result in lower expenses as a percentage of total revenue.
Higher revenues along with lower costs will expand margins and
increase profitability over the long run.
We believe that Equinix's decision to register itself as a REIT
company will prove beneficial. Equinix's board of directors has
approved the conversion and it is in the process of seeking a
private letter ruling (PLR) from the Internal Revenue Service
(IRS). The tax benefit achieved from the REIT status will allow
Equinix to distribute a significant portion of its profit as
dividends, which will lead to enhancement of shareholder value.
Nonetheless, Equinix competes with Internet data centers
operated by established communications carriers such as AT&T (
), Level 3 Communications (
), COLT, Verizon (
) and NTT among others, as well as REITs such as Digital Realty
Trust and DuPont Fabros. In addition to competing with neutral
co-location providers, the company competes with traditional
co-location providers, Internet service providers and Web-hosting
Moreover, setting up data centers requires huge capital outlays
and Equinix plans to add more data centers in the coming quarters
to satisfy the growing demand for co-location and interconnection
services. Apart from this, the company expects more cash outlays in
relation to the REIT conversion.
Last but not least, the telecommunications industry is currently
undergoing consolidation. As customers combine businesses, they may
require less co-location space, and there may be fewer networks
available to choose from. In addition, increased utilization of
existing co-location space could reduce the attractive expansion
opportunities available to Equinix.
Currently, Equinix has a Zacks Rank #2 (Buy).
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