DCK Investor Edge: The company’s recent M&A binge has made for a rough year for its shareholders, but there’s now a lot of potential for future growth.
It’s been a tough year for Equinix shareholders. Now, a lot is riding on strategy and growth plans to be revealed at the Analyst Day on June 20.
Equinix (EQIX) shares have been in a bear market since the beginning of the year. This is in sharp contrast to previous years, where stronger revenue and AFFO per share growth drove impressive performance for investors.
Results reported for Q1 2018 were a mixed bag. Strength in Europe and Asia-Pacific was offset by slower growth in the Americas. The main culprit was lackluster performance of the Verizon Americas data center acquisition. Also, full-year 2018 AFFO guidance was a bit lighter, coming in at $1.595-$1.635 billion versus consensus for $1.669 billion.
Notably, Verizon results are expected to rebound in 2019, as space for up to 3,000 cabinets will become available at the network-dense Miami NAP of the Americas, where colocation expansions should also drive cross-connect revenues at an even faster clip.
Tale of the Tape – Tough Sledding
Equinix shares are currently down 14.8 percent from the beginning of the year, and 9.4 percent over the past 12 months.
During the past 52 weeks, Equinix has traded in a range of $371 - $495 per share. Friday's $386 closing price was just 4 percent above the 52-week low and 22 percent under the high.
The crucial question for investors has become: Are Equinix shares a falling knife or a coiled spring going forward?
M&A Has Been a Drag on Results
Arguably, the plethora of M&A deals signed over the last year is the main culprit. In other words, Equinix’s sluggish AFFO-per-share growth rate is self-inflicted. Those deals were:
- IO UK data center business in February
- Acquisition of the colocation business from Verizon in May
- Zenium data center acquisition in October
- Itconic acquisition in October
Going forward, there will be an additional headwind from the Dallas Infomart and Metronode (Australia) acquisitions, both of which closed last month. These two deals will be dilutive to existing shareholders in 2018. They were particularly pricey: at 30x EBITDA each, which is a significant premium over Equinix’s own current multiple.
What About Revenue Synergies?
The near-term headwind in earnings growth might turn out to be a sensible trade-off versus the strategic value to the global network from assets added to the Equinix platform.
Notably, in Dallas, a portion of the parking lot adjacent to the Infomart building has been entitled for a 40MW multistory data center annex. There is still 11MW of expansion capacity available in the iconic downtown carrier hotel, which already houses four of the eight Equinix data centers in Dallas. There is existing space and land for expansion in Australia for revenue synergies from Metronode as well.
Investors will have to wait until the Analyst Day in June for Equinix management to explain the timing of revenue synergies from selling into available space and new ground-up expansion opportunities.
Hyperscale Initiative Economics
Last quarter, Equinix revealed that its Paris 8 data center would be the first built as part of the strategic initiative HIT, or hyperscale infrastructure team. These build-to-suits are intended to service the needs of the top 12 global cloud, technology, and SaaS providers. During Q1 2018, Equinix did not book or report any additional hyperscale activity.
On the first-quarter earnings call there was discussion in general terms regarding hyperscale projects being financed off balance sheet, with various investors allowing higher leverage to drive returns. Again, expect more detail on this to be revealed on Analyst Day.
Another “Known Unknown”
There is an additional variable that’s hard to quantify. Former CEO Steve Smith unexpectedly stepped down in January 2018. The sudden departure of Equinix's former charismatic leader had nothing to do with executing on the business model and strategic plan. Equinix is generally viewed as having an exceptionally deep bench of C-suite executives, including long-time CFO Keith Taylor and Charles Meyers, former COO, now president of Strategy, Services, and Innovation.
The resume of Peter Van Camp (PVC), who took over for Smith in January on an interim basis, makes him an ideal transition CEO for Equinix. He also continues to serve as executive chairman, a position he was appointed to in April 2007. Prior to becoming executive chairman, he served as Equinix's CEO and director since 2000, and president since 2006.
Investor Edge
Equinix continues to deliver on mid-teens dividend growth. The shares currently yield 2.4 percent, which is on the high end for this global interconnection giant. But it’s certainly at the low end for many income-focused investors. Still, the growth rate is the prize here.
The low AFFO payout of 45 percent is coupled with mid-teens dividend growth. The current FactSet consensus is for another 15-percent boost to the dividend in 2019, to $10.49, from $9.12 per share. Few other REITs – in any sector – come close to this type of performance.
There is a lot riding on the upcoming Analyst Day. A five-year growth plan is expected to be revealed. Equinix has an unequaled global moat, well-positioned to take advantage of the digital transformation and distributed IT architecture trends. Now, the company is layering the HIT initiative on top of the retail colocation business model.
Investors should always be wary of falling knives. However, my sense is that initiating or adding Equinix shares at current levels will be rewarded by a bounce back following the Analyst Day catalyst.