Equinix (EQIX Quick QuoteEQIX - Free Report) is well-poised to benefit from the robust data center demand. Its recurring revenue model and strategic expansions are encouraging. A solid balance sheet provides financial flexibility. Regular dividend payouts result in shareholder wealth creation.

However, competition from other data centers, which leads to aggressive pricing policies, is a key concern for Equinix. High interest expenses add to its woes.

Last December, EQIX collaborated with Dell Technologies to help enterprises deploy flexible and scalable AI infrastructure. Its International Business Exchange (IBX) data centers integrate the Dell AI Factory with NVIDIA to deliver a comprehensive suite of products, solutions and services on a neutral, cloud-adjacent platform.

In the past three months, this Zacks Rank #3 (Hold) stock has risen 7.7% against the industry’s 6.6% decline. Analysts seem bullish on this data center REIT with the Zacks Consensus Estimate for its 2025 funds from operations (FFO) per share having moved northward marginally to $38.32 over the past two months.

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What’s Aiding Equinix Stock?

The demand for high-performing data centers will escalate in the years to come with the exponential rise in data traffic, which will require enterprises to engage data-center service providers such as Equinix. Therefore, the increasing total addressable market for data centers provides an immense growth opportunity for Equinix. Management expected total revenues to increase 7% in 2024 on a year-over-year basis.

Equinix is likely to benefit from favorable operating leverage. Its business generates a substantial portion of monthly recurring revenue bookings (greater than 90% of total revenues in the last three years) from existing customers. The company generated 36% of the recurring revenues from its 50 largest customers during the three and nine months ended Sept. 30, 2024. For 2024, we estimate recurring revenues to increase 6.2% on a year-over-year basis.

Equinix continues focusing on acquisitions and developments to expand data center capacity in key markets and strengthen its competitive positioning and global reach. In November 2024, the company announced its plans to establish a new data center in Singapore, with an initial investment of $260 million. As of the end of the third quarter of 2024, it had 57 major builds underway across 35 markets in 22 countries, including 13 xScale builds representing more than 22,000 cabinets of retail capacity and more than 100 megawatts of xScale capacity through the end of 2025.

Equinix’s robust balance sheet position enables it to capitalize on long-term growth opportunities. As of Sept. 30, 2024, the company’s liquidity totaled $7.2 billion. Moreover, it enjoyed investment-grade credit ratings of Baa2 from Moody’s, BBB rating from S&P Global Ratings and BBB+ from Fitch Ratings as of the end of the third quarter of 2024, rendering it favorable access to the debt market.

Solid dividend payouts remain the biggest attraction for REIT investors and Equinix has remained committed to that. It has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 12.02%. Given a robust operating platform, our year-over-year growth projection of 11.7% for 2024 adjusted funds from operations, healthy financial position and a lower dividend payout (compared with its industry), its dividend distribution is expected to be sustainable over the long run. Check Equinix’s dividend history here.

What’s Hurting Equinix?

However, Equinix competes with data centers operated by established communications carriers and REITs, including Digital Realty Trust (DLR Quick QuoteDLR - Free Report) and Iron Mountain Incorporated (IRM Quick QuoteIRM - Free Report) . In addition to competing with neutral colocation providers, the company competes with traditional colocation providers, Internet service providers and Web-hosting facilities.

Considering the strong growth potential, competition is expected to increase from existing players and the entry of new players into the space. The increased competition is likely to lead to aggressive pricing policies, making Equinix vulnerable to pricing pressure.

Despite the Federal Reserve announcing rate cuts recently, the interest rate is still high and is a concern for Equinix. As of Sept. 30, 2024, its total debt principal outstanding was nearly $17.79 billion. Our estimate indicates a year-over-year increase of 10.1% in the company’s 2024 interest expenses.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO), a widely used metric to gauge the performance of REITs.