Equinix: The King Of Tech REITs Is Finally A Good Buy (NASDAQ:EQIX)

This article was written by Dividend Sensei.

The media loves to hype the future, and that’s what it’s been doing with the “AI war” between Google (GOOGL) (GOOG) and Microsoft’s (MSFT) Bing.

Over the first few days of MSFT’s limited public beta, it’s become obvious that ChatGPT-powered Bing is not ready for prime time.

But rest assured that AI is the future, as is cloud computing, the Internet of Things, and automation in general.

What’s the easiest way you can profit from the risk of big tech trends like these? I would argue that a pick-and-shovel infrastructure REIT like Equinix (NASDAQ:EQIX) is the lowest-risk way to profit from these secular megatrends.

Let me show you three reasons why, no matter who “wins the AI wars,” Equinix, the king of tech REITs, will likely make long-term dividend investors rich.

Reason One: Equinix Is The Global King of Tech REITs

Equinix is the largest data center REIT in the world, with the strongest balance sheet and the most skilled and adaptable management team.

It was founded in 1998 in Redwood City, California, and since then has built up quite the data center empire:

• Equinix operates 249 data centers in cities in 32 countries

• more than 10,000 customers

• including 2,100 network providers

Its data centers can operate with 99.9999% reliability, a level that almost no other data center REIT can match.

It’s a truly diversified company with 40% of sales from the US, 6% from Latin America, 32% from the Middle East, Africa, and Europe, and 22% from Asia and Australasia.

Its 10 largest customers, on average, rent over 80 data centers from EQIX and generate 18% of its recurring sales.

• about 95% of revenue is monthly recurring

• 90% of recurring revenue is from existing customers

The recent “battle” between GOOG and MSFT over chat-driven search is largely hype, fueled by a media desperate to catch headlines.

But AI-driven cloud computing is indeed the future of the global economy, and no one is better positioned to profit from this secular megatrend than EQUIX.

EQIX benefits from three secular megatrends:

• exponential growth in data

• the need for data to be connected

• companies outsourcing data storage to the cloud

The key to EQIX’s wide moat comes down to location, location, location.

Its data centers are located centrally in the largest tech hubs in the world, where it’s costly and difficult to replicate its asset base.

EQIX also has the most data on-ramps of any cloud computing REIT by a wide margin.

These let enterprise clients like AT&T and Verizon send their data to EQIX centers and connect to any cloud-computing provider they want.

No matter who dominates AI, or cloud computing, EQIX is an agnostic “one-stop shop” that can help companies store their data more efficiently and improve their profitability.

“According to InfoTech Research Group, moving one cabinet’s equipment costs $10,000. For context, Equinix’s monthly recurring revenue per cabinet is about $2,000, and retail contracts typically last two to four years.” – Morningstar

Data center REIT leases aren’t as long as some REIT sectors, usually about three years.

However, given the economics of this industry, pricing power tends to be pretty good since a 10% lower cost from a rival provider has a 50-month payback period.

“Charles Meyers joined Equinix in 2010 with more than 25 years of experience in executive leadership positions at leading technology and IT companies, including Verisign, Level 3 Communications, and BellSouth.” – Equinix

EQIX’s management team is led by tech industry veteran Charles Meyers who has been adapting and overcoming challenges in the sector for a quarter century.

Morningstar calls his management “exemplary.”

That’s thanks to a laser focus on smart growth, a strong balance sheet, and ensuring that EQIX is the industry leader, who, along with DLR, is “head and shoulders” above the rest of its peers.

“During his 22+ year tenure, CFO Keith Taylor has stewarded the company through a period of exceptional growth, delivering approximately $6 billion in annual revenue and a record-setting 18 years of consecutive quarterly revenue growth. He has completed 27 acquisitions and deployed more than $40 billion of capital to help fund the growth.” – Equinix

Its CFO, Keith Taylor, has been with the company for over two decades and has helped it complete 27 acquisitions for $40 billion, with almost every deal proving accretive to shareholders within a few years.

EQIX’s five major market opportunities, ranging from consumer data to utilities, logistics, and automotive, represent a $23.3 trillion addressable market.

Or, to put it another way, EQIX’s customers generate about 20% of the entire global economy, and that share is likely to grow steadily for decades.

EQIX’s global reach and unbeatable reliability are why it’s a favorite among the world’s cloud computing giants.

• 41% of AWS (Amazon) nodes are housed at EQIX facilities

• 44% of Azure (Microsoft)

• 44% of Google Cloud

• 53% of Oracle’s nodes

EQIX’s industry-leading reliability isn’t just for its data centers. It has a 79-quarter revenue growth streak, the longest in the S&P 500.

Every year on average, it makes one or two acquisitions to expand its scale and moat further.

To do that, EQIX harnesses the best balance sheet in the industry by far.

In an industry where rating agencies consider 6X debt/EBITDA safe, EQIX’s leverage ratio tends to range from 3X to 4X, depending on the timing of acquisitions.

Today its leverage ratio is 3.5X, and 96% of its debt is a fixed rate, with an average maturity of almost nine years.

EQIX has $6.4 billion in short-term liquidity, which is enough to fund about two years’ worth of acquisitions.

And thanks to borrowing overseas, EQIX’s average borrowing cost is 2.0%, the lowest in the industry.

That’s compared to an AFFO margin of 33%, meaning EQIX’s low cost of capital allows it to make deals that no one else can do profitably.

As EQIX’s acquisitions mature and it scales up more customers per data center, management estimates that cash yield on invested capital doubles from 13% to 29%. EQIX controls its destiny, with 61% of recurring revenue coming from properties it owns outright and another 27% from properties under long-term leases beyond 2037. Its average lease for properties it doesn’t own is 18 years.

In other words, EQIX has supreme cash flow stability, allowing it to have such a safe and dependable dividend growing at double-digits for seven years.

EQIX has historically used a very conservative AFFO payout ratio of about 43%, which analysts expect to continue through at least 2028.

For context, 90% is a safe payout ratio for data center REITs.

EQIX harnesses its retained cash flow to grow faster and maintain its wide moat lead over its peers.

Reason Two: Industry-Leading Growth As Far As The Eye Can See

Just because data center REITs benefit from three secular megatrends doesn’t mean economic and industry trends can’t affect their growth rates.

Right now, margins are under pressure from inflation. But that doesn’t mean that EQIX isn’t growing.

EQIX Medium-Term Growth Consensus

Metric	2022 Growth Consensus	2023 Growth Consensus (recession year)	2024 Growth Consensus	2025 Growth Consensus	2026 Growth Consensus
Sales	8%	12%	8%	8%	11%
Dividend	8%	10%	8%	10%	7%
FFO	9%	6%	8%	11%	12%
AFFO	9%	6%	8%	11%	12%
EBITDA	4%	-17%	10%	11%	NA
EBIT (operating income)	4%	-50%	16%	16%	NA

Click to enlarge

(Source: FAST Graphs, FactSet)

While 2023 AFFO growth is expected to slow a bit, it’s expected to reaccelerate to 12% by 2026.

And the dividend is expected to keep growing at a rate about 66% higher than the REIT sectors.

Analysts think EQIX could grow around 15% long-term though I’m a bit skeptical of that growth outlook.

However, within a reasonable margin of error, EQIX hasn’t missed growth estimates since 2016, and its historical analyst margins of error are plus or minus 5%. EQIX’s growth rates have ranged from 9% to 33%, with 9% to 10% growth over the last five years.

That might not sound too exciting but remember that the REIT sector is growing at 6%, meaning EQIX is one of the growth kings of REITdom.

• 9% to 16% historical margin-of-error adjusted growth consensus rate

Investment Strategy	Yield	LT Consensus Growth	LT Consensus Total Return Potential	Long-Term Risk-Adjusted Expected Return
Equinix (Analyst Consensus)	1.9%	14.9%	16.8%	11.8%
Nasdaq	0.8%	10.9%	11.7%	8.2%
Equinix (9% Growth Rate)	1.9%	9.0%	10.9%	7.6%
Dividend Aristocrats	1.9%	8.5%	10.4%	7.3%
S&P 500	1.7%	8.5%	10.2%	7.1%
REITs	3.9%	6.1%	10.0%	7.0%
60/40 Retirement Portfolio	2.1%	5.1%	7.2%	5.0%

Click to enlarge

(Sources: DK Research Terminal, FactSet, Morningstar)

At the conservative end, EQIX should be able to beat the S&P, dividend aristocrats, and REIT sector.

If analysts are right (and seldom are wrong with this REIT), EQIX might be able to continue delivering its historical market and Nasdaq-crushing returns.

Rolling Returns Since 2000

EQIX’s historical rolling returns average 20% to 21% over time, and given the massive growth markets the company is tapping, it might indeed be able to deliver 17% long-term returns.

Inflation-Adjusted Consensus Return Potential: Per $1,000 Investment

Time Frame (Years)	7.9% CAGR Inflation-Adjusted S&P 500 Consensus	14.6% CAGR Inflation-Adjusted EQIX Consensus	Difference Between Inflation-Adjusted EQIX Consensus And S&P Consensus
5	$1,465.25	$1,973.17	$507.92
10	$2,146.96	$3,893.41	$1,746.45
15	$3,145.84	$7,682.37	$4,536.53
20	$4,609.44	$15,158.64	$10,549.19
25	$6,753.99	$29,910.60	$23,156.61
30	$9,896.29	$59,018.77	$49,122.48

Click to enlarge

(Source: DK Research Terminal, FactSet)

If EQIX grows as analysts expect, then it could deliver potentially life-changing 59X inflation-adjusted returns over the next few decades.

Time Frame (Years)	Ratio Inflation-Adjusted EQIX Consensus vs. S&P consensus
5	1.35
10	1.81
15	2.44
20	3.29
25	4.43
30	5.96

Click to enlarge

(Source: DK Research Terminal, FactSet)

Which is potentially 6X more real wealth and income than the S&P 500 over the next 30 years.

Reason Three: A Wonderful Company At A Fair Price

Historically EQIX is worth 25X to 27X FFO.

Metric	Historical Fair Value Multiples (10-Years)	2022	2023	2024	2025	12-Month Forward Fair Value
5-Year Average Yield	1.76%	$704.55	$775.00	$775.00	$913.07
13-year median yield	1.75%	$708.57	$779.43	$779.43	$918.29
P/FFO	25.54	$754.71	$792.76	$860.70	$963.37
Average		$721.91	$782.32	$803.18	$931.04	$785.53
Current Price	$716.76
Discount To Fair Value		0.71%	8.38%	10.76%	23.01%	8.75%
Upside To Fair Value (including dividend)		0.72%	9.15%	12.06%	29.90%	11.50%
2023 FFO	2024 FFO	2022 Weighted FFO	2023 Weighted FFO	12-Month Forward FFO	Historical Average Fair Value Forward P/FFO	Current Forward P/FFO
$31.04	$33.70	$26.26	$5.18	$31.45	25.0	22.8

Click to enlarge

If we include historical dividend yields, we can see that EQIX’s fair value is about 25X FFO, and today’s 22.8X multiple represents approximately a 9% discount, creating a 12% upside to fair value.

Rating	Margin Of Safety For Very Low-Risk 13/13 Ultra SWAN Quality Companies	2023 Fair Value Price	2024 Fair Value Price	12-Month Forward Fair Value
Potentially Reasonable Buy	0%	$782.32	$803.18	$785.53
Potentially Good Buy	5%	$743.21	$763.02	$746.26
Potentially Strong Buy	15%	$664.98	$682.70	$667.70
Potentially Very Strong Buy	25%	$557.41	$602.38	$589.15
Potentially Ultra-Value Buy	35%	$508.51	$522.07	$510.60
Currently	$716.76	8.38%	10.76%	8.75%
Upside To Fair Value (Including Dividends)		11.05%	13.96%	11.50%

Click to enlarge

For anyone comfortable with its risk profile, EQIX is a potentially good buy offering a solid total return profile over the next few years.

Risk Profile: Why Equinix Isn’t Right For Everyone

There are no risk-free companies, and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

Equinix Risk Summary

“Our Morningstar Uncertainty Rating for Equinix is High. Its capital-heavy nature minimizes its ability to be agile in the face of a market downturn. We expect secular tailwinds to keep its long-term, upward trajectory intact, but if demand for third-party data centers weakens for any reason, Equinix would find itself with too much capacity and weakened cost profile.

We think technological advances pose the biggest risk to Equinix’s long-term prospects, as they could result in an environment where cloud growth, interconnection, and data usage continue to grow, but Equinix is not the beneficiary. Virtualization and Moore’s law could result in a scenario where Equinix’s customers satisfy their exploding data needs with less physical space and power.

Big cloud providers’ accumulating power is a moderate risk for Equinix, as we believe those firms underpin Equinix’s network effect advantage. We expect cloud providers’ importance to continue growing, leaving Equinix more susceptible to these companies playing hardball. We do not think cloud providers want to compete with Equinix’s co-location business, considering the difficulty we believe they’d have in duplicating a network of their customers, but we think their leverage could result in less favorable terms for Equinix.

The biggest ESG risk we see is based on the massive power consumption data centers account for, a shift in how customers try to manage their own carbon footprints and in the publicity surrounding power consumption could be problematic. However, Equinix has been in front of this trend. It intends to achieve what it calls “climate neutral” status by 2030 and is working toward making its data centers run 100% on renewable energy, though this adds the risk of being able to procure enough green energy at reasonable prices. Other risks include natural disasters bringing down data centers and the risk of cybersecurity breaches, as the world’s most sensitive data all flows through data centers like Equinix’s.” – Morningstar

Equinix’s Risk Profile Includes:

• modest economic cyclicality risk (not usually enough to cause negative growth)

• overcapacity risk if the technology proves more efficient than currently expected

• technology disruption risk: cloud computing giants are starting to take more datacenters in-house

• M&A execution risk (EQIX has made 27 acquisitions over the last 20 years)

• labor retention risk (tightest job market in over 50 years)

• currency risk (operates in 32 countries)

• interest rate risk: rolling over debt at potentially much higher interest rates (could cause growth to come in lower than currently expected)

How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.

Long-Term Risk Management Analysis: How Large Institutions Measure Total Risk Management

DK uses S&P Global’s global long-term risk-management ratings for our risk rating.

• S&P has spent over 20 years perfecting their risk model

• which is based on over 30 major risk categories, over 130 subcategories, and 1,000 individual metrics

• 50% of metrics are industry specific

• this risk rating has been included in every credit rating for decades

The DK risk rating is based on the global percentile of a company’s risk management compared to 8,000 S&P-rated companies covering 90% of the world’s market cap.

EQIX Scores 83rd Percentile On Global Long-Term Risk Management

S&P’s risk management scores factor in things like:

• supply chain management

• crisis management

• cyber-security

• privacy protection

• efficiency

• R&D efficiency

• innovation management

• labor relations

• talent retention

• worker training/skills improvement

• occupational health & safety

• customer relationship management

• business ethics

• climate strategy adaptation

• sustainable agricultural practices

• corporate governance

• brand management

EQIX’s Long-Term Risk Management Is The 125th Best Risk Manager In The Master List (75th Percentile In The Master List)

Classification	S&P LT Risk-Management Global Percentile	Risk-Management Interpretation	Risk-Management Rating
BTI, ILMN, SIEGY, SPGI, WM, CI, CSCO, WMB, SAP, CL	100	Exceptional (Top 80 companies in the world)	Very Low Risk
Strong ESG Stocks	86	Very Good	Very Low Risk
Equinix	83	Very Good	Very Low Risk
Foreign Dividend Stocks	77	Good, Bordering On Very Good	Low Risk
Ultra SWANs	74	Good	Low Risk
Dividend Aristocrats	67	Above-Average (Bordering On Good)	Low Risk
Low Volatility Stocks	65	Above-Average	Low Risk
Master List average	61	Above-Average	Low Risk
Dividend Kings	60	Above-Average	Low Risk
Hyper-Growth stocks	59	Average, Bordering On Above-Average	Medium Risk
Dividend Champions	55	Average	Medium Risk
Monthly Dividend Stocks	41	Average	Medium Risk

Click to enlarge

(Source: DK Research Terminal)

EQIX’s risk-management consensus is in the top 25% of the world’s best blue-chips, on par with the likes of:

• Visa (V): Ultra SWAN

• T. Rowe Price (TROW): Ultra SWAN dividend aristocrat

• Lowe’s (LOW): Ultra SWAN dividend king

• Philip Morris International (PM): Ultra SWAN dividend king

• Target (TGT): Ultra SWAN dividend king

The bottom line is that all companies have risks, and EQIX is very good at managing theirs, according to S&P.

How We Monitor EQIX’s Risk Profile

• 27 analysts

• three credit rating agencies

• 30 experts who collectively know this business better than anyone other than management

• and the bond market for real-time fundamental risk-assessment

“When the facts change, I change my mind. What do you do, sir?”

– John Maynard Keynes

There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead, we always follow. That’s the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.

Bottom Line: The King of Tech REITs Is Finally A Good Buy

Let me be clear: I’m NOT calling the bottom in EQIX (I’m not a market-timer).

13/13 Ultra SWAN quality does NOT mean “can’t fall hard and fast in a bear market.”

Fundamentals are all that determine safety and quality, and my recommendations.

• over 30+ years, 97% of stock returns are a function of pure fundamentals, not luck

• in the short term; luck is 25X as powerful as fundamentals

• in the long term, fundamentals are 33X as powerful as luck

While I can’t predict the market in the short term, here’s what I can tell you about EQIX.

• The global industry leader in data centers

• very safe 1.9% yield (growing at 8% to 10% for the foreseeable future)

• 10.8% to 16.8% long-term return potential Vs. 10.2% S&P and 10% REITs

• 9% historically undervalued

• 22.8X FFO vs 25X to 27X historical

• 80% consensus return potential over the next five years, 13% annually, 2X more than the S&P 500

If you’ve ever wondered how you can profit from the rise of AI, big data, cloud computing, and automation, EQIX is a great way to do it.

If you want to make sure you win no matter which tech titan wins the AI wars, then EQIX is one of the best dividend stocks you can buy.

If you want to own the highest quality and strongest name in this industry at a reasonable price, then now is the time to consider buying Equinix.

Author’s note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.