Equinix: Zacks’ Bull of the Day Play

Equinix (EQIXAnalyst Report) is a global provider of network-neutral data centers and Internet exchange services for enterprises, content companies, systems integrators and network service providers. The company is headquartered in Redwood City, CA with two more regional headquarters in London and Singapore.

Through its 100+ International Business Exchanges, or IBX, data centers across 33 strategic markets in the US, Europe, Middle East, Africa, and Asia-Pacific regions, customers can directly inter-connect critical traffic exchange requirements.

A Unique Place Amidst Customers and Competitors

There is a reason that Equinix is considered the dominant data-network infrastructure provider globally. It has to do with its unique place in an enterprise and telecom marketplace where data-rich transmission and storage services are still growing rapidly.

Equinix has been achieving continued business momentum with its critical mass of customers and the resultant “network effect” within its IBX centers. Direct interconnection with its networks, connecting the majority of the world’s Internet routes, enables customers to increase the efficiency of their IT infrastructure, remove complexities associated with infrastructure administration and management and reduce costs.

Service offerings, such as Equinix Exchange and Equinix Internet Exchange, significantly reduce the cost of critical transit, peering and traffic exchange operations by eliminating the costs of private peering or local loops. The benefits provided by the Platform Equinix have led to a loyal and blue-chip customer base of over 6,300 firms.

While some Equinix customers, such as AOL, Google (GOOGLAnalyst Report) and MSN, build and operate their own data centers for their large infrastructure deployments, these customers rely on Equinix IBX centers for their critical inter-connection relationships.

Equinix’s business is based on a recurring revenue model comprising Co-location, Interconnection, and Managed IT Infrastructure Services. These services are considered to be recurring, as customers are billed at fixed rates on a recurring basis through the life of the respective contracts, which generally run for one to three years.

Approximately half of Equinix’s existing customers order new services in any given quarter. Recurring revenues accounted for 95% of total 2014 revenue.

AT&T (TAnalyst Report), British Telecom, Cable & Wireless, Comcast (CMCSAAnalyst Report), Level 3, NTT, Qwest, SingTel, Sprint and Verizon Business (VZAnalyst Report) are other big customers, as well as potential competitors.

The REIT Effect

On Jan 1, 2015, Equinix successfully converted itself into a REIT company which should prove beneficial over the long run. The tax benefit achieved from the REIT status will allow Equinix to distribute a significant portion of profit as dividends, which will lead to enhancement of shareholder value.

The strategy, along with key M&A initiatives, has paid off this year with shares climbing 30%. Plus, the stock has recovered nearly all ground lost since the stock market correction in last August.

Organic and M&A Growth

Equinix expects the total addressable market for data centers to increase at a CAGR of 8% from 2013 to 2017 to reach $24.0 billion. Based on this projection, the company expects its revenues to increase at the rate of 10% through 2017.

And acquisitions have been a major contributor to sustained growth at Equinix. The company has made several moves to continue expanding its data center capacity in many of its key markets since 2003. In May 2015, the company signed a deal to acquire Telecity Group Plc, a U.K.-based company. The acquisition is likely to help the company expand in Europe by meeting the growing demand for digital services.

On September 8 Equinix announced the purchase of Bit-isle, a provider of colocation datacenters in Japan, for $440 million. The company could not have built this infrastructure cheaper, and the acquisition adds a domestic Japanese customer base, which should allow for more cross-selling in the tech-sophisticated country.

Here’s what the company said in their press release…

With the successful acquisition of Bit-isle, Equinix will gain significant scale by creating the fourth largest data center operator in Japan. Upon completion of the acquisition, Equinix will gain five data centers in Tokyo and one in Osaka in close proximity to the existing Equinix International Business Exchange (IBX) data centers in Japan creating campuses for customers’ future expansion needs. After the completion of TY5 in Q1 2016, Equinix will have 10 IBX data centers in Tokyo and two in Osaka.

The earnings estimates for EQIX have been ramping up fast lately and that’s why the stock is back to a Zacks #1 Rank. Given the strong rebound from the August 24 “flash correction” down to $250, it seems institutions are still very hungry to own the shares.

I wouldn’t be surprised to see new all-time highs above $300 very soon this year.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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