To The Moon

Data is the new oil

[By Edmund Chan: CIO of Tiger Fund Management]

In a recent Citi Conference, Equinix $Equinix(EQIX)$ CEO Charles Meyers was asked for three reasons to buy Equinix. He replied with the following reasons:

1) continued long-term demand from digital transformation 2) differentiated, durable story in digital competency3) strong track record of delivering durable growth.

I concur with his views.

Without a doubt, Equinix is the global market leader among data centre companies.

Here are some insights:

1. Global leadership

2. Go-to-Market Strategy

3. Growth Potential

4. Premium valuation

Global leadership

Equinix manages an impressive network of 248 data centers worldwide, with 138 owned by the company. This ownership is equivalent to 67% of their total 29.4 million gross square feet.

Equinix's exceptional position is further solidified by its extensive connectivity, boasting over 2,000 networks, 3,000+ cloud companies, and a staggering 452,000+ interconnections.

The company's track record in expansion and development, coupled with its ability to achieve cash flow breakeven within 6-12 months for new data centre, has earned Equinix a reputation for success.

Go-to-Market Strategy

Equinix stands out with its well-defined go-to-market strategy, which effectively addresses customer needs and fosters strong customer loyalty within its ecosystem. This approach creates a protective moat, making it challenging for retail colocation competitors to gain market share.

The company adopts a systematic internal process, known as STAR (Segmentation, Targeting, Activation, and Reporting) to engage potential customers, offering more than just space and power and avoiding a price-driven competition.

With a dedicated team of 3,000 professionals, including sales and technical, Equinix ensures comprehensive support for its customers. The recent addition of 100 salespeople in the past seven months underscores the company's commitment to enhancing customer engagement and driving growth.

Growth Potential

During the recent 2023 Analyst Day, Equinix presented a bullish outlook for the next five years.

Management expressed optimism in the emerging demand for Artificial Intelligence, resulting in an increased revenue guidance of an 8-10% compound annual growth rate (CAGR) over five years. This revised guidance surpasses their previous projection of 7-9% growth.

Accordingly, dividend guidance was raised to a 5-year CAGR of 10%+, an increase from previous guidance for 8-10%. This dividend growth would come from cash generation, not an increase in the payout ratio.

Furthermore, Equinix maintained its AFFOps (Adjusted Funds From Operations) guidance, anticipating a 7-10% CAGR until 2027, which demonstrates remarkable consistency despite rising interest expenses.

Equinix has set its sights on a lucrative Serviceable Addressable Market (SAM) of $140 billion by 2026. This ambitious goal encompasses various sectors, with $52 billion expected from the retail industry, $51 billion from hybrid cloud services, and $21 billion from AI-related solutions. The remaining portion of the SAM comprises hyperscale and cloud networking.

Equinix has prioritized investments in this area. Approximately 10% of their $3 billion annual capex will be allocated towards further enhancing their digital services offerings.

Premium valuation

Equinix maintains a conservative balance sheet of 3.4x net debt-to-adjusted EBITDA, with access to significant capital. The company is rated investment grade corporate credit ratings by S&P, Fitch, and Moody's.

Equinix is trading at 22.8x EV/EBITDA. This is a premium compared compared to 21.6x and 13.1x for Keppel DC REIT and SUNeVISION respectively. But this premium valuation is justified by its leadership position in the data centre market.

Historically, the company is trading at its 3-year mean EV/EBITDA.