Expanding xScale And Fabric Will Meet Growing AI And Compute Demands

Key Takeaways

• Simplifying digital infrastructure consumption and building larger data centers aim to boost revenue growth and improve margins.
  
• Expanding xScale, cloud on-ramps, and channel programs are key strategies for increasing recurring revenue and earnings potential.
  
• Currency fluctuations, non-core product challenges, and capacity constraints challenge Equinix's revenue growth amid competitive pricing pressures and operational inefficiencies.

Catalysts

Equinix (Nasdaq: EQIX) is the world's digital infrastructure company.

• Equinix plans to simplify the path for customers to consume digital infrastructure by introducing automated quoting and capacity visualization tools, revising compensation plans, and improving the segmentation approach. This is expected to accelerate value creation for customers, leading to faster conversion from bookings to revenue and potentially increasing net margins.
  
• The company's focus on building larger data centers in fewer phases aims to meet the growing demand for contiguous capacity from customers. This strategy could accelerate the delivery of saleable capacity and enhance revenue growth.
  
• Equinix is committed to the xScale business, having leased approximately 150 megawatts of capacity in 2024 and planning to invest further. The continued demand for xScale indicates significant revenue opportunities and the potential for higher earnings as capacity is leased.
  
• The expansion of cloud on-ramps and interconnection services, such as Equinix Fabric, supports the growing needs for high-performance compute and AI, particularly in inferencing and training workloads. This is likely to drive increased recurring revenue and improve net margins.
  
• The ongoing channel program, which delivered nearly 30% of bookings and over 50% of new logos in 2024, enhances Equinix’s market reach and customer base. This program is expected to contribute to revenue growth and customer diversity, potentially leading to increased earnings.

Equinix Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Equinix's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.3% today to 15.7% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $17.19) by about March 2028, up from $815.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.1 billion in earnings, and the most bearish expecting $1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 75.8x on those 2028 earnings, down from 102.6x today. This future PE is greater than the current PE for the US Specialized REITs industry at 29.4x.
• Analysts expect the number of shares outstanding to grow by 2.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.52%, as per the Simply Wall St company report.

Equinix Future Earnings Per Share Growth

Risks

• The significantly stronger U.S. dollar in Q4 has tempered Equinix's reported numbers and outlook, suggesting that currency fluctuations could continue to impact revenue negatively.
  
• A decision to end-of-sale Equinix Metal and a $160 million impairment charge indicate that non-core products have not met expectations, potentially affecting future revenue diversification.
  
• Capacity constraints in Tier 1 metros have inhibited potential bookings, pointing to a limitation in maximizing revenue growth until these are addressed.
  
• A challenging macroeconomic environment with elevated levels of competition may impact pricing dynamics and net margin growth, particularly in key growth areas like AI and high-performance compute.
  
• A $73 million impairment charge related to the Hong Kong 4 asset and a $31 million restructuring charge suggest potential operational inefficiencies that could pressure net margins if not effectively managed.

Valuation

• The analysts have a consensus price target of $1020.16 for Equinix based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1200.0, and the most bearish reporting a price target of just $809.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $10.8 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 75.8x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $859.52, the analyst price target of $1020.16 is 15.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.