Why Equinix Shares Popped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of big data center operator Equinix (Nasdaq: EQIX  ) rallied as much as 14% almost immediately following the opening bell after an announcement that its board of directors has approved its transition to becoming a real estate investment trust.

So what: Equinix has been tinkering with the idea of converting to a REIT for some time now, and it's one of the primary reasons the stock has rallied so spiritedly over the previous couple of months. REITs receive favorable tax status in exchange for paying out 90% or more of earnings to shareholders in the form of a dividend. According to Equinix, it plans to pay out $700 million to $1.1 billion annually in dividends, of which up to 20% will be in cash, and the remainder in stock. Equinix plans to file a private letter ruling with the IRS by the end of this year to aid with its transition and expects to officially have REIT status by fiscal 2015.

Now what: One reason shares have been deflating since the open -- now up just 7% -- has to do less with the news and more with the type of distribution. I'm pretty confident in saying that shareholders were expecting a beefier cash portion of the dividend. According to Equinix's broad payout estimates, its initial dividend would be around $2.90 to $4.60 in cash for a yield of 1.45% to 2.3% (based solely on its cash payout). Personally, my biggest beef with Equinix remains its valuation. In spite of heavy enterprise big data spending, I find it impossible to wrap my head around the company at 52 times forward earnings and would recommend treading lightly around Equinix until further notice.

Craving more input? Start by adding Equinix to your free and personalized Watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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