EUR 850.00 For Business Accounts Only

Morningstar | Another Great Quarter For Equinix Is Simply Consistent With Our Long-Term View; Maintaining $415 FVE

Equinix reported an outstanding fourth quarter to conclude an excellent year, producing record bookings in the quarter and, for the first time, exceeding $5 billion in revenue for the full year. However, the numbers are simply consistent with our belief that Equinix is one of the best positioned data center firms. Our view on the company is based on its highly connected properties--a primary source of the firm's narrow moat--and a global footprint that positions it to address the needs of all potential customers. As this view already underpins our long-term forecast, we saw nothing that will cause us to significantly alter our projections, which already consider a bright future and were in line with 2019 guidance. We see the stock as only mildly undervalued relative to our maintained $415 fair value estimate.

On a normalized constant currency basis (excluding acquisitions and adjustments), revenue grew 8% in the quarter (year over year) and 9% for the year. Interconnection revenue, which we think is a key differentiator for Equinix, continues to grow faster than colocation revenue, as it was up 12% year over year in the fourth quarter and full year.

While Equinix continued to generate strong top line growth, EBITDA was unable to keep pace. It grew 5% in the quarter and 7% for the year (on a normalized constant currency basis). We don't see this as a concern, but rather the reality that it is difficult to accelerate revenue growth while enhancing profitability. Equinix's sizable capacity expansion in recent years results in lower occupancy rates, as new properties take time to reach normalized occupancy, limiting the firm's operating leverage. In addition to the near-term margin headwind, Equinix's increased expansion rate causes capital spending to remain elevated. It exceeded $2 billion in 2018, and the firm will likely spend a similar amount in 2019, keeping capital spending in the 35%-40% of sales range.

The combination of slower margin expansion and elevated capital spending reinforces our belief that growth isn't free, and while Equinix's revenue line is impressive, it won't continue indefinitely, especially without commensurate levels of spending. We expect that over the next few years, EBITDA margins will rise (up to 50% by 2022, an increase of 250 basis points from 2018) and capital intensity will fall to 20% in 2023 from over 40% in 2018. However, we expect sales growth to moderate as well.

We believe that this evolution toward a more mature business model is already occurring in the Americas, and we eventually expect EMEA (Europe, Middle East, and Africa) and Asia to follow suit. The Americas region continues to grow revenue more slowly than EMEA and Asia, up 5% normalized constant currency in 2018 as opposed to low-to-mid-double digits in both international segments. We see the Americas as an indicator of the future for Equinix's business as a whole. While we think Equinix will maintain very respectable growth over our 10-year forecast, averaging mid- to high-single digits on the top line, we expect it will gradually decelerate, and investors expecting a much longer period of organic double-digit growth, as we've seen in recent years, will be disappointed.