On Friday, an HSBC analyst raised the rating for Equinix (NASDAQ:EQIX) stock, a company specializing in internet connection and data centers, from Hold to Buy. Accompanying this upgrade, the price target was also increased to $1,000 from the previous target of $865.
The analyst cited several reasons for the optimistic outlook on Equinix. Improved utilization rates are expected to hasten revenue growth to 10% by 2025, a jump from the 7% projected for 2024.
This anticipated growth is attributed to a lower interest rate environment that is favorable for small and medium-sized enterprise (SME) consumption, which in turn boosts utilization rates and available capacity in key markets.
Another factor contributing to the positive assessment is the projected exponential growth of the company's xScale joint venture's contribution to adjusted funds from operations (AFFO), spurred by increased investment. Furthermore, Equinix is poised to benefit from its leading position in retail data centers as artificial intelligence (AI) progresses into the inferencing phase.
The analyst also noted that Equinix's growth potential seems higher and more stable compared to Digital Realty (NYSE:DLR), owing to its exposure to the more stable-priced retail vertical. The valuation of Equinix was deemed attractive based on its growth opportunities.
The price target of $1,000 is grounded on an average historical AFFO multiple of 23.5x, which is a 5% discount to the 2022-23 average. This discount reflects the ongoing concerns related to the investigation by the Securities and Exchange Commission (SEC) and the Department of Justice (DoJ), which the analyst acknowledges as a significant downside risk.
In other recent news, Equinix has partnered with Singapore's GIC and the Canada Pension Plan Investment Board to form a joint venture. This collaboration aims to raise over $15 billion to bolster Equinix's hyperscale datacenter operations in the United States.
Goldman Sachs has maintained a Buy rating on Equinix, emphasizing the potential within the hyperscale market. Equinix has also entered into a series of agreements potentially worth up to $2 billion, involving equity distribution and forward sale agreements.
Equinix has reported an 8% year-over-year increase in second-quarter revenues, totaling $2.2 billion, largely attributed to its xScale program. BMO Capital and TD Cowen have reaffirmed their positive ratings for Equinix, while CFRA has downgraded it from Buy to Hold due to valuation concerns.
Equinix has issued over $750 million in green bonds, underlining its commitment to sustainability. Lastly, the company announced the departure of Scott Crenshaw, the Executive Vice President and General Manager of Digital Services.
InvestingPro Insights
Equinix's financial metrics and market performance align well with the analyst's optimistic outlook. The company's revenue growth of 8.05% over the last twelve months supports the projected acceleration to 10% by 2025. With a market capitalization of $83.19 billion, Equinix demonstrates its significant presence in the data center industry.
The company's strong dividend growth of 24.93% over the last twelve months, coupled with a current dividend yield of 1.94%, underscores its financial health and commitment to shareholder returns. This aligns with the analyst's positive view on Equinix's growth potential and stable pricing in the retail vertical.
InvestingPro Tips highlight Equinix's consistent revenue growth over the last few years and its high return on invested capital, which corroborate the analyst's confidence in the company's future performance. These insights, along with 13 additional tips available on InvestingPro, provide a comprehensive view of Equinix's financial standing and growth prospects.
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