Equinix (“Narrow Moat”) is the world’s largest data center operator, enabling hundreds of charter companies to house their servers and network equipment in a shared environment.
Tenants can then connect to each other, cloud service providers, and telecom networks.
Equinix operates 240 data centers in 66 markets around the world and owns just under half of them.
The company has nearly 10,000 customers, including 2,000 networks, across five segments: cloud and IT services, content providers, network and mobile services, and financial and corporate services.
About 70% of Equinix’s revenue comes from leasing space and related services, and more than 15% comes from connecting clients to one another.
Equinix operates as a real estate investment company.
Equinix has developed network-dense locations in major cities that will be extremely difficult for competitors to replicate.
Telecom networks, cloud providers, and other organizations host their equipment and connect to each other at Equinix sites, and their presence attracts each other.
We expect the importance of interconnectedness to continue to grow, and in our view, no company is better positioned than Equinix to capitalize on.
Equinix hosts most cloud ramps of any data center provider in the world.
With Equinix data centers, companies can connect their own devices directly to multiple cloud service providers, reducing latency, improving security and making the data center attractive to both parties.
The growing reliance on hybrid cloud models, where companies use a mix of their own cloud devices and services, makes Equinix’s prospects bright.
The importance of networks
Although we expect the cloud to be the largest source of growth in the future, we believe that network service providers are key to enabling this growth.
Networks are not only necessary for Equinix tenants to access the outside world, but they use Equinix facilities to connect to each other, making sites essential components of the Internet and providing nearly a quarter of Equinix’s revenue.
With a presence in many of the world’s densest cities and more than 2,000 network service provider clients, Equinix facilities are major Internet exchange points in many major cities around the world.
Maintaining a fair value
We maintain our fair value estimate of $560 per share, which means an EBITDA multiple of 19 times based on our estimate for 2022.
We expect revenue growth of around 9% per year on average over the next decade.
We expect Asia Pacific, EMEA to grow faster over the next five years, while revenue from the Americas, which is already a mature market, will grow to single digits.
We expect the company to add 15,000 to 20,000 lockers annually throughout our 10-year forecast period, which will result in low to medium single-digit annual growth, and we expect the company to continue adding single-digit hookups.
We now expect average annual growth of 3% in both average revenue per locker and average revenue per intercom.
In our view, the greater potential Equinix now offers with Equinix Fabric and Equinix Metal as well as its growing global presence will further increase the level of revenue generation.
We also expect cabinet use to increase from about 80% in 2021 to 85% by 2031.
We believe interconnection will continue to be the fastest growing part of the Equinix business, primarily due to the growing need for customers to connect to their cloud services.
We expect interconnection revenue to grow on average at around 10% annually through 2031.
Excluding Equinix’s investment in its ultra-large-scale xScale joint venture, which is expected to generate a few hundred million dollars in capital expenditures each year over the next several years, we expect capital expenditures to remain above $2 billion over the next two years.
We expect capital spending to return to less than $2 billion by 2024 as new data center construction begins to moderate.
We believe Equinix can increase its adjusted EBITDA margin as it gradually transitions to owning more of its assets, thereby reducing rental expenses.
We expect adjusted EBITDA margin to grow by about five percentage points over the next decade to more than 52% by 2031.
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