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Better Buy: Iron Mountain vs Equinix

Dec 10, 2020 by Matt Frankel, CFP
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Iron Mountain and Equinix have some characteristics in common: Both own data centers, and both brands are well-known for securing their customers' data. However, these are two very different real estate investment trust (REIT) investments. In this discussion, we'll take a closer look at these two REITs and what investors need to know before adding one (or both) to their portfolio.

Iron Mountain is the paper records leader, but that's not all

Iron Mountain is the worldwide leader in records management, but its core business isn't digital -- at least not yet. The bulk of Iron Mountain's revenue comes from its roughly 300 storage facilities where customers store sensitive hard-copy records.

To be clear, when it comes to paper records storage, Iron Mountain is in a class by itself. It operates in about 50 countries around the world, serving more than 225,000 customers, including 95% of the Fortune 1,000. And hardcopy records storage is a necessity for many businesses all around the world, particularly businesses in the healthcare, financial, and legal industries, which happen to be Iron Mountain's top three customer types.

While hardcopy records storage is Iron Mountain's bread-and-butter, there's a lot more to the company. For example, most Americans have seen one of Iron Mountain's mobile document shredding trucks driving around -- the company's "secure shred" business makes up one-fourth of the company's service revenue.

One key point is that Iron Mountain's core business will decline over time. Records storage (even in the industries mentioned earlier) is gradually transitioning to digital methods, and while Iron Mountain's records storage business isn't in imminent danger, it isn't exactly going to be a long-term growth driver, either.

The good news is that Iron Mountain is well aware of this and has been slowly adding data centers and digital records services to its business. While the data center side of the business is less than 10% of the company's total revenue, it's growing rapidly. The current data center portfolio has the potential for about three times its current capacity, and management recognizes that the pathway to future growth is helping their vast customer base with the "digital transformation" of record keeping.

Equinix sets the bar for data center operators

While Iron Mountain is an up-and-coming player in the data center world, Equinix is the undisputed industry leader. The company is one of the largest REITs of any kind in the world, approximately eight times the size of Iron Mountain by market cap.

Equinix operates 227 data centers around the world, and the company's facilities are considered to be the gold standard of data centers. In fact, other companies' data centers are often judged based on their physical proximity to the nearest Equinix data center. They are essentially considered the "hubs" of the internet.

Equinix has a long track record of growth and shareholder returns. The company has increased revenue for 71 consecutive quarters and has produced a 935% total return for investors over the past decade, nearly quadrupling the total return of the S&P 500.

Two very different types of investments

A quick look at some basic metrics shows just how different these two REITs are as investments. Iron Mountain trades for a rock-bottom valuation and pays an enormous dividend yield, indicative of just how much transformation risk the market is pricing into the stock. On the other hand, Equinix is an industry leader in the growing data center industry, with a fantastic track record of responsible growth and the premium valuation that comes with it.

Company (Symbol) Recent Stock Price Price-to-FFO (TTM) Dividend Yield
Iron Mountain (NYSE: IRM) $29.85 11.6 8.3%
Equinix (NASDAQ: EQIX) $696.57 28.4 1.5%

Data source: Company press releases and CNBC. Dividend yields and P/FFO are current as of 12/8/2020. P/FFO based on "normalized" or "adjusted" FFO figures, where available.

Which is the better buy?

Equinix is a tried-and-true data center leader with a fantastic track record of delivering growth and income to shareholders. On the other hand, Iron Mountain is trying to build out its digital business quicker than its physical records storage business declines, and there's a ton of execution risk ahead of it. However, the company does have a brand synonymous with records security and hundreds of thousands of customers who could potentially become digital records customers.

Equinix is certainly more of a sure thing and is the more appropriate of the two for investors without a great deal of risk tolerance. On the other hand, if Iron Mountain can execute its data center growth ambitions, it could end up being a steal at the current valuation.

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Matthew Frankel, CFP owns shares of Iron Mountain. The Motley Fool owns shares of and recommends Equinix. The Motley Fool has a disclosure policy.