Why We Do Not Love Equinix

Equinix_logo

Equinix (NASDAQ: EQIX), one of the leading providers of colocation services has opened a new data center in Rio de Janeiro. The center is the company’s second facility in the city and has been christened RJ2 and has space for 320 cabinets, which will be hauled up to 1170 cabinets through further investments of $36 million in the next two phases of development. The latest addition to the number of data centers operated by the firms globally will definitely help the firm increase revenues and improve revenue growth. However the cost at which the growth is achieved is one fact which could cause sleepless nights for Equinix investors.

Huge cost of growth

The company has maintained an average revenue growth rate of close to 16.03% on a Y/Y basis for the last 5 quarters. Though the Company has been experiencing significant revenue growth the total operating expenses have also increased at a similar pace, thereby leading to operating margins which have marginally declined. While it is true that investors value growth, there has to be some sort of leverage between the expenses and revenue growth of a company. In short, for every additional dollar of revenue Equinix has invested in its business, it has been able to generate only 1 dollar of revenue. Now that’s not a sustainable business model in the long term.

Equinix_revenue_vs_expenses_chart

Low Rate of returns

An extension of the company’s operating efficiency is the low rate of returns the company is generating. Any business model lacking operating efficiency/operating leverage will be unable to significantly improve their operating margins. This has been the case at Equinix too. This is reflected in the low returns the company generates. The company has a return on assets of 1.21%. The Return on equity is just slightly better at 3.51%, which is an indication of the financial leverage/debt used by the company to finance its operations. A comparison with its nearest competitor Rackspace (NYSE: RAX) makes the point clear. One look at the table below and it is easy to understand why any investor would pick Rackspace ahead of Equinix as an investment choice.

Particulars

Equinix

Rackspace

Debt/Equity

1.28

0.09

ROA

1.21%

8.11%

ROE

3.51%

11.43%

Average Y/Y growth rate

(last 5 Quarters)

 

16.03%

 

23.72%

 

Conclusion

The business model operated at Equinix is not one we at Amigobulls are fond of. The company has neither been able to deliver significant revenue growth nor improve its profits margins considerably. The company has trailed its nearest competitor in revenue growth as well as returns generated, a combination of facts which will keep us away from the Equinix stock. Equinix stock closed yesterday at $183.65, registering a marginal gain over its previous close of $183.55.

To see Equinix’s latest stock price movement, click here (NASDAQ: EQIX)   Disclaimer: We do not hold any stake in the aforesaid stocks. For detailed disclaimer, please click here.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and RAX stock

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virendra
Definitely Rackspace is a far better investment, but only when compared to Equinix. The P/E in excess of 70 is definitely far above what i call 'luring.'
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