I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But even I have to admit some growth stories are bogus, hence this regular series.
Next up: Equinix (Nasdaq: EQIX ) . Does this data center operator deserve the 33% haircut it received yesterday? Let's get right to the numbers.
|CAPS stars (5 max)||**|
|Bullish pitches||14 out of 25|
|Peers||On2 Technologies, PHOTOCHANNEL NETWORKS, Artificial Life|
Data current as of Oct. 7.
Equinix took a beating after reducing guidance in a press announcement late Tuesday. The cuts reduced the mid-point of third-quarter revenue guidance by 2.2% and full-year guidance by 1.2%.
"This updated guidance is due to underestimated churn assumptions in Equinix's forecast models in North America, greater than expected discounting to secure longer term contract renewals and lower than expected revenues attributable to the Switch and Data business acquired in April 2010," the company said in a statement.
Many Fools rating the stock in CAPS yesterday and this morning believe the sell-off was an overreaction. "Even if they come in with these weak numbers for 3Q, 4Q, and [year-end] they are still killing it," wrote Foolish investor soulever yesterday in recommending the stock. This CAPS member sees today as the beginning as of an extended rally:
As management settles in with its typical [collocation], hosting, and network deals I am sure they will land a couple global strategic relationships that will make up for missing plan. If we are all smart we jump in and enjoy the ride back to $100 before the end of the year.
Among professional analysts, Oppenheimer is the only one weigh in on the announcement so far. The All-Star firm yesterday downgraded the stock from "outperform" to "perform."
The elements of growth
Last 12 Months
|Normalized net income growth||30.2%||294.4%||Not measurable|
|Shares outstanding||45.6 million||39.3 million||37.7 million|
Source: Capital IQ, a division of Standard & Poor's.
Who's right? There's an equal mix of good and not so good trends represented in this table. Let's review:
- Revenue growth has been decelerating from a couple years ago, not what I like to see as a growth investor. The good news? There's still plenty of growth to be had; Wall Street expects Equinix to improve earnings 23% annually over the next several years.
- Gross margin is inching upwards, indicative of favorable pricing trends. The bad news is this may not last. Equinix cited unexpected discounting in revising its revenue outlook.
- Receivables worry me. When revenue deceleration meets higher receivables, it can mean that write-offs of unpaid bills are looming. We don't know that's the case with Equinix -- it's way too early for such hysteria -- but I'd advise owners to keep a close watch on the company's balance sheet.
Competitor and peer checkup
Normalized Net Income Growth (3 yrs.)
|AT&T (NYSE: T )||11.6%|
|Digital Realty Corporation (NYSE: DLR )||53.2%|
|DuPont Fabros Technology (NYSE: DFT )||Not available|
|Internap Network Services (Nasdaq: INAP )||Not measurable|
|SAVVIS (Nasdaq: SVVS )||Not measurable|
Source: Capital IQ. Data current as of Sept. 30.
I've one word for this: uuuuuuggggggglllllyyyyy.
Losses throughout the sector have left just AT&T and Digital Realty, a San Francisco-based real estate investment trust (REIT) whose principal business is operating and renting data center space, looking good. Apparently, consistency isn't Equinix's forte.
After yesterday's sell-off, a short-term boost in Equinix shares is certainly possible and may well be deserved. But looking at the structure of the underlying business, I see a company paying plenty of interest on increasingly higher levels of debt while producing moderate and even low returns on capital. That's a recipe for poor stock returns.
Now it's your turn to weigh in. Do you like Equinix at these levels? Let the debate begin in the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.
For further Foolishness featuring Equinix: