Equinix Q2 Results: Solid Earnings But Valuation And Risks Loom Large

Introduction/Earnings - Equinix reported a strong second quarter with revenue up 2% QoQ and 7% YoY, beating expectations for revenue, EPS, and FFO [2] - AFFO per diluted share increased by 4% sequentially and 16% YoY, with TTM AFFO per share up 8.66% YoY compared to the sector median of 2.27% [2] Capital Structure - The company issued $750 million of 5.5% USD Notes due 2034, swapping this debt to EUR with an effective coupon of approximately 3.9% [4] - Equinix has a blended borrowing rate of 2.4%, a net leverage ratio of 3.5x, and total gross debt of $14.2 billion [4] - 96% of their debt is fixed rate, providing financial stability even if interest rates rise [3] Capital Expenditures - Historical recurring capex is in the 2-5% range, with Q2 at 2.1% of sales; non-recurring capex was $603 million, or 27.9% of sales [6] - The majority of non-recurring expansion funds are being deployed in the Americas, supporting the company's high growth REIT pricing [6] Guidance - FY2024 guidance is strong at $8.69-$8.77 billion, with total CapEx expected to be around $3 billion, representing 34.3% of sales [7] - AFFO per diluted share is expected to be $34.99, indicating shares are trading at 23.1x FY2024 AFFO [7] Valuation - Equinix is trading at 23.1x forward AFFO compared to the sector average of around 16x, making it susceptible to share price volatility if growth slows [8] - The forward dividend yield is 2.18%, lower than the sector median of 4.42% [8] Market Position - Equinix is the largest data center REIT globally, benefiting from the growing demand for data storage, projected to grow at a CAGR of 17.3% from $245 billion in 2023 to $932 billion in 2030 [9] - The company has strategic partnerships with major tech firms like Amazon, Microsoft, and Google, which enhances its market position [9] Risks - High valuation poses a risk, as negative surprises in future earnings could lead to significant drawdowns [10] - Insider selling has been noted, with over 146,000 shares sold in the past 24 months, raising concerns about management's outlook [10] - A short report by Hindenburg Research raised questions about the company's maintenance capex practices, although an audit found no need for changes [12]