Please ensure Javascript is enabled for purposes of website accessibility

Why Equinix REIT Is So Expensive -- but Still a Buy

By Liz Brumer-Smith – Dec 3, 2021 at 2:10AM

Key Points

  • Equinix's revenue has grown for 18 years straight.
  • Equinix is a leading global data-center REIT, making it a top pick for exposure to this fast-growing industry.
  • Long-term trends back high demand and growth opportunities for data-center facilities for most of this decade.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With shares trading near $800 per share, here's why the company's still worth its price tag.

Equinix (EQIX 2.30%) has been an incredible value builder among real estate investment trusts (REITs) over the years. The company, which specializes in the operation, leasing, and management of data centers around the world, has outperformed the S&P 500 by more than 50% during the past decade.

Being a top performer means share prices for Equinix are at a premium. The company's current share price-to-funds from operations (FFO), a common metric used to understand a REIT's valuation, sits at 47.5. A price-to-FFO of 20 times to 30 is where most REITs trade, so it's clear that Equinix is very richly valued. But being expensive doesn't always mean it's not a worthwhile buy.

Stellar results have led to premium pricing

Equinix was founded in 1998 as a Silicon Valley start-up and has since grown into the largest data-center REIT by market cap and one of the world's largest data-center providers. Today, Equinix owns or has interests in 237 facilities in 27 countries on five continents. 

While its global reach and high-quality portfolio explain some of its allure for investors, the company's performance shines brightest. Equinix has achieved 75 consecutive quarters, or more than 18 years, of consistent revenue growth. And unlike in other commercial real estate sectors, the pandemic proved to be a profitable opportunity for Equinix, as lockdowns drove soaring internet usage and increased demand for data facilities.

Two people working on data center facility.

Image source: Getty Images.

This has helped the company sustain its strong historical growth, with impressive earnings this year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were up 7% year over year in the third quarter, and adjusted funds from operations (AFFO) increased 7%. In 2020, revenue rose 8% from the prior year, and as of this year's third quarter, revenue was on track for a 10% to 11% increase.

The company is also well-positioned financially, with a low net leverage ratio of 4.0 times -- or debt to EBITDA  --  and $3.3 billion in liquidity.

Long-term trends support Equinix's future

Data storage is becoming a more important service in our technological society, a trend that probably will continue. As more products, platforms, and services move online, the need to store and protect the associated data increases. Fortune Business Insights recently conducted a historical study of data storage services to help predict industry growth. The study projects that global cloud storage market will increase from $76.43 billion in 2021 to as much as $390.33 billion in 2028, at a compounded annual growth rate of 26.2%.

Given that Equinix is the largest data-center operator among U.S. publicly traded REITs, and recent mergers for CyrusOne (CONE) and CoreSite leave Equinix and just one other data-center REIT in the market, the company is poised to benefit from this growth. However, there are risks to consider, including the fact that Equinix doesn't own many of its properties; instead, it leases much of its space from other data providers. This model works when Equinix wants to expand rapidly, but doesn't let the company add value by owning stable assets. 

Equinix has underperformed the S&P 500 this year, leaving investors to wonder whether its best days lie behind it. Other data-center REITs can offer similar exposure to the marketplace for much less money. But they don't have the long-standing history and comparable worldwide market exposure of Equinix. For many investors, those factors combined make Equinix an appealing buy regardless of how expensive it is today.

Liz Brumer-Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CyrusOne and Equinix. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.