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About Equinix
Every now and again I will unapologetically drive to my nearest Portillo’s, which just so happens to be nearly four hours away (one way, that is) from where I reside in Austin, Texas.
Sure, we could peck away at the fact that I have some issues to deal with if I am that desperate to roll up to just north of Dallas, Texas to indulge in a few hot dogs, burgers (there is absolutely no way I am divulging how many I get of each, as while I usually don’t mind severely embarrassing myself, today is just not the day) and, of course, what would be such a meal be without voluminous amounts of french fries and some cheese sauce to dunk said fries in like Shaq?
I know, I have problems, but hey, you’re here, right?
However, there are certainly a fair bit of sights to see on the way towards Dallas, such as a few notable rest areas in smaller yet mighty fun Texas towns (shoutout to Jarrell, Texas and Temple, Texas, y’all, am I right?), moving up even more northward towards Waco, Texas, home of lots of legal matters surrounding patents (seriously, look it up) and the absolutely gigantic sight of McLane Field just off of the interstate, home to the Baylor Bears’ football program, and then, ladies and gentleman, we enter Dallas, Texas, which is certainly where I tend to explore (and keep my head on an absolute swivel so as to avoid the bad drivers), as there is a great deal of sights to check out such as the city’s skyline, the planes zipping in and out of local airfields such as Dallas Love Field, the ADP building I without fail pass by every single time adjacent to the interstate and then the direct inspiration for this here stock analysis article, an enormous Equinix building.
Truth be told, I had absolutely no clue what this company did at the time, however, I’ve done some research and it turns out that Equinix is a platform that serves many platforms and their platforms.
Platform cubed, if you will.
What in the name of Arby’s Sauce do I mean?
Take a random technology company such as Spotify.
Spotify is a platform in and of itself that, for those who don’t know, is primarily focused on streaming music as well as podcasts and audiobooks.
Therefore, it is also a platform for not only artists, but, of course, also listeners and their fans that use Spotify as a platform to stream their favorite singers, musicians, podcasters, or whoever it may be that has a spot (yeah, yeah, pun intended, whatever) on the company’s platform.
The final, critical platform that Spotify truly relies upon is the company in question, Redwood City, California-headquartered Equinix, which operates a large amount of data centers and facilities across the United States and the globe that help a well scaled, established company such as Spotify runs it platform and connect its users to those they love to listen to and keep up with on the music and podcast scenes.
How does this work? Well, this largely goes over my head, but to put it in simple, digestible and nevertheless accurate terms, Equinix (through its various data centers) houses a hefty amount of computers and interconnected machinery that, behind the scenes, keep the company’s platform (Spotify in this scenario) and its functions thereof operating at an efficient rate. Some might describe it as an information highway and so many different companies are just operating in their different lanes, all driving on Equinix’s infrastructure highway, using the roads and lanes it has built and established.
Speaking of some of the company’s customers, some of them include the likes of some of the world’s largest, most relied upon technology companies and platforms such as Microsoft, Amazon Web Services (AWS), Google’s Cloud Platform, IBM Cloud, Salesforce, Oracle Cloud, Alibaba Cloud, Meta Platforms, Spotify, Netflix, SAP, Dell Technologies, AT&T, among plenty of others that seemingly rely upon the efficient and proper operation of Equinix’s machines and facilities in keeping their own digital platforms on track for their users and themselves as well.
This is pretty darn interesting, as it is undoubtedly the case that Equinix is a mission critical technological infrastructure company.
I will also say that one of the interesting differentiators entangled within this company is in the fact that it, in more respects than none, is in the real estate business, not just because it is indeed categorized as a real estate investment trust (REIT), but even more so because it basically generates the bulk of its revenues through essentially selling or leasing out its machines and equipment to its aforementioned customers so they can use them, of course, paying for this privilege, which probably costs a pretty penny.
And given the current state of affairs and excitement and defined promise enveloping artificial intelligence and cloud computing, one could perhaps say that demand for Equinix and its products and services are currently in incredibly high demand, and I would personally go one step further and say that this demand is likely to continue rising given the sheer computing power and data that is going to be needed to operate both present and future initiatives, and the prospects for these initiatives are fairly promising, but they would be absolutely nothing without Equinix’s machines and capabilities.
Evidently, this is an intermediate and long-term tailwind we see for this company, and while there will more than likely be some ebbing and flowing in demand, as is the case with basically any company and/or industry over a long enough span of time, we maintain a definitively bullish stance on these technology arenas.
With all of this in the eggshell, now seems like an appropriate time to learn more about this company from a more objective financial perspective, so as to ultimately make a decision as to whether or not this company’s stock (NASDAQ: EQIX) is worth buying and holding indefinitely, or given the recent AI hype, is one perhaps much better off letting this company’s stock cool down before diving in.
Or maybe it isn’t even worth purchasing under any circumstances.
We don’t know yet.
Let’s check Equinix out and devise an opinion on this company, its stock and its future performance.
Equinix’s stock financials
Like we said, Equinix is a REIT, meaning that 90% of its taxable income is required to be distributed to its shareholders, so it is far from surprising that this company issues a healthy annual dividend to its shareholders, specifically in the amount of $17.04, which, in comparison to the other blue chip companies is much larger and impressive, indicating that this company has a more than solid amount of income being generated on an annualized basis.
On top of this company’s REIT-related dividend, Equinix’s stock price (NASDAQ: EQIX) is trading at a high price and perhaps an even higher valuation, with the company’s shares presently trading at $810.98 (yes, that is the cost of a single share of stock) with an associated price-to-earnings (P/E) ratio of 90.15, all while being a $78.68 billion company, according to its present market capitalization.
Clearly, Equinix’s shares are trading at elevated levels and our hopes of this company’s revenues growing are certainly still intact, however, growing at a rate that justifies paying nearly 90 times earnings is a whole different story, as this company’s recent annual revenue figures ought to be growing at exceedingly exponential rates on a year-over-year (YOY) basis to simply justify paying such a sizable premium for an ownership stake in this technology and networking company.
It just is what it is.
At any rate, let’s dig more into this company’s financials and gain some further clarity regarding Equinix, as perhaps some of it will paint a rosier picture with respect to its admittedly elevated valuation.
Equinix’s executive team is at the helm of and is responsible for managing and taking care of approximately $30.3 billion in terms of total assets alongside just about $18.8 billion in terms of total liabilities, which, all things considered, is a comforting overall total asset-total liability breakdown, with the company’s total assets weighing much heavier than its prevailing total liabilities at the moment, indicating that Equinix has a good deal of financial resources that it can use to expand its facilities into new territories and geographies, buy back its own stock, perhaps buy some smaller scaled, leaner data and network infrastructure companies, and/or pay down some debt(s) in the process.
As one might be able to tell, this balance sheet gives Equinix a lot of options and boy is this a positive.
Onto the condition of the company’s income statement, Equinix’s annual revenues since 2018 have definitely been growing, but, again, at this current valuation level, not even close to a rate that would adequately justify paying this much of a premium for shares of the company’s public stock.
The valuation is just crazy at the moment, which can largely be attributed to historical and present excellent performance and execution, but even more so the artificial intelligence hype currently prevailing within the technology industry and practically the rest of the world, for that matter.
Nevertheless, as a reference, Equinix’s annual revenues have started off at a relative base of just north of $5 billion (2018) and have since risen to its latest reported (again, annualized) revenue figure of $7.2 billion, as reported in 2022.
Demand is up and customers are evidently sticking around, in addition to new companies likely signing up with Equinix, but again, not at a quick enough rate to justify leaning into the current valuation.
Regarding the company’s cash flow statement, Equinix is evidently great at generating copious amounts of cash, not to mention that its total cash from operations (also measured during and between 2018 and 2022) have been gradually rising on a year-over-year basis, with, for example, the company’s total cash from operations pegged at just about $1.8 billion in 2018, rising each and every year up to almost $3 billion, as reported in 2022, which as a relative percentage of its previously outlined and mentioned revenues, is frankly fantastic.
Equinix’s stock fundamentals
This leads us into excavating into the state of the company’s profitability, specifically on a trailing twelve month (TTM) net profit margin basis and even more specifically how it measures up against that of the competition’s average.
With that, according to the figures displayed on TD Ameritrade’s platform, Equinix maintains a TTM net profit margin of a rather disappointing 10.95% to the industry’s respective listed average of 22.23%, which, to a degree can be expected given the sheer size and scale of this company and its operations, not to mention the fact that it runs a lot of different pieces of equipment worldwide, but being more than halfway away from the industry’s respective average is still not at all what we had initially expected, slightly indicating that Equinix needs to perhaps cut out some of its less necessary yet exorbitant costs, be it some labor, equipment or the plethora of other costs associated with operating a company such as this one.
As previously noted, cash generation isn’t a major challenge for the company, however, TTM net profitability is technically a separate matter and this has to be addressed and meaningfully and positively changed in the next handful of years, from our perspective.
Lastly, as it pertains to the company’s core TTM returns on both assets and investment(s), also referencing the figures shown on TD Ameritrade’s platform, Equinix lags behind the industry on both accounts, thankfully by smaller margins, and therefore given the aforementioned details and information related to just how large this company and the sum of its parts are, we give a little more grace and leniency, with, for instance, the company’s TTM return on assets pegged at 2.85% to the industry’s respective average of 3.95%.
Should you buy Equinix stock?
And that is quite candidly saying something given just how bullish we are on cloud computing demands, as we really are bullish on the present and the future of this category as well as the further integration of artificial intelligence.
But objectivity is just that, and we need to make sure that we stick to our parameters, as even though this company’s revenues have been rising on a year-over-year basis, its balance sheet is in excellent shape, its cash flows are in a great spot and its TTM returns on assets and investments are somewhat competitive and the fact that it pays out a very soothing annual dividend to its shareholders, the remaining fact(s) of the matter remain that Equinix’s stock (NASDAQ: EQIX) is trading at a very, very high price-to-earnings multiple, not to mention that its comparable TTM net profit margin is, well, not so comparable, as a matter of fact.
While we really did want to give this company and its stock all of the benefit of the doubt, we must remain objective and offer the company’s shares a “sell” rating, which honestly would’ve been “hold” rating, however, we still find ourselves puzzled and unhappy with its present TTM net profit margin.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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