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Morningstar | Equinix's Strong 1Q is No Surprise, So We Are Maintaining Our $415 FVE

Equinix has proven itself time and again to be an excellent operator and a first-rate data center firm, with its interconnection foundation leading to our narrow moat rating. Against that backdrop, Equinix's consensus-beating quarter was in line with our forecast, and our full-year projections are still within the firm's raised guidance. We are maintaining our 2019 revenue and margin assumptions and $415 fair value estimate. The stock is now in 3-star territory after its 35% rise from the December lows and trading above our fair value estimate, so we'd look for a better entry point.

Revenue grew 12% year over year, with currencies providing a one percentage point tailwind. We project the growth rate to be lower the rest of the year, as the firm laps two acquisitions in the second quarter, resulting in our full-year estimate of 10% revenue growth. The firm's 48% adjusted EBITDA margin was up 70 basis points versus last year's first quarter and marked the highest level in at least a decade. We expect Equinix to be able to sustain a similar margin throughout the year, and we believe there is room for further expansion in future years as the firm moves to own, rather than lease, a greater portion of its portfolio.

As has been the case for several quarters, Europe and Asia Pacific were the growth engines, growing colocation revenue 15% and 26%, respectively, compared with last year's first quarter (after accounting for 2018's Metronode acquisition, we estimate organic growth in Asia Pacific was in the midteens). U.S. revenue growth was 3%, but slightly less on an organic basis due to last year's Infomart acquisition. We expect this dynamic to continue, as we believe the mature U.S. market leaves Equinix's growth opportunities overseas, especially as its U.S. customers expand their global presence. While we estimate mid-single-digit U.S. growth annually over the next five years, we project the international markets to maintain high-single to low-double-digit growth.

Interconnections continue to be what sets Equinix apart from its competitors. The firm now has over 324,000 cross connects, which leads the industry by a wide margin, and is increasingly expanding its ECX fabric product, a virtual connection that allows customers to connect to other Equinix data centers globally. However, while we believe its Internet exchanges, colocation, and the resulting cross connects provide Equinix a unique advantage, fabrics and virtual connections are available from competitors as well and make competitors better equipped to provide customers with connections to their cloud providers. Therefore, we don't see ECX fabric as a revolutionary product that will further the gap between Equinix and competitors but rather a product it must have to ensure it can still provide a superior offering.

The availability of fabrics contributes to what we believe is a converging industry, from what historically had more distinct colocation providers, which enabled interconnection, versus wholesale providers, which did not. Equinix is also a part of the blurring distinction, as it has foreshadowed for over a year that it would be entering a joint venture to build hyperscale data centers. The firm now plans to provide specific details within the next quarter, but it seems the initial projects will be in Europe. The hyperscale plans are not currently part of our model, and we like management's idea to keep its noncontrolling interest in the JV off the balance sheet and apart from operating income. We think that will allow Equinix to continue showing the higher profitability and returns associated with its colocation and interconnection model. We doubt the JV will materially change our projections or how we view the company.