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An Undervalued REIT That Benefits From the Cloud

Data center provider Equinix should enjoy strong top-line growth, increasing operating leverage, and dividend growth in the years to come.


Alex Zhao: Equinix is the largest retail data center provider around the globe, and we are confident about the foundational role Equinix plays in facilitating the advent of enterprise cloud, which results in a profitable revenue stream for Equinix. It is trading at a discount to our fair value estimate of $500. It is structured as a REIT with over 2% dividend yield at current prices, considering the announced 14% dividend increase. We believe the recent pullback on concerns related to its latest acquisitions provides a good opportunity for investors to invest in a name that offers secular growth driven by enterprise cloud.

We continue to be pleased with the firm's growth across verticals and regions, as it continues to expand its customer base at a solid pace, thanks to its channel strategy that attracts more customers to its data centers from channel partners, like Amazon.

The firm also expands its data center footprint to 190 data centers in 48 metro areas around the globe, giving it unmatched global scale. It recently made two acquisitions in the U.S. and Australia, respectively. While both deals are somewhat pricey in our opinion, we believe both offer longer term strategic benefits.

In the highly fragmented yet fast-growing retail co-location industry, we believe a roll-up strategy is very likely to be effective, and Equinix is executing this strategy well. This should lead to strong top-line growth and increasing operating leverage in the years to come, with dividend growth to follow.

Alex Zhao does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.