Equinix's share price experienced a drop this week.
Equinix, a leading data center operator, is experiencing a growth slowdown due to increased spending and debt costs associated with expanding its data center capacity to capitalize on the growing demand for artificial intelligence (AI).
The company's adjusted funds from operations (AFFO) per share growth outlook for 2025-2029 has been revised down to 5-9%, from the previous 7-10%, primarily due to higher interest rate assumptions on debt refinancing and new debt, and increased capital expenditures (capex) to support its "Build Bolder" expansion strategy. This strategy aims to double Equinix's data center capacity by 2029 to meet the increasing demand for AI capabilities.
Despite the growth slowdown, many analysts remain bullish on Equinix's long-term prospects. Evercore ISI maintains an Outperform rating with a $1,035 price target, and UBS analysts keep a Buy rating at the same price target. UBS analysts highlighted that while the company’s updated financial targets imply a near-term slowdown in per-share growth due to ramped-up investments, the industry fundamentals and secular trends remain supportive, and there is expected acceleration in growth after 2027.
However, Equinix's shares have dropped significantly in the short term, down more than 20% year-to-date at one point, due to investor concerns about the slower growth and high valuation metrics. As of Thursday night, Equinix's share price has decreased by almost 16% week-to-date.
The data center industry is experiencing a major expansion due to the popularity of AI. Intensifying capital expenditure requirements are justified due to the demand for robust AI functionality without bottlenecks. Patient investors who are willing to wait it out over the long term may find value in Equinix's stock, as the company is poised to benefit from the long-term AI-driven market expansion.
Raymond James and BMO Capital Markets have downgraded their recommendations on Equinix's stock, while some analysts view the current weakness as a temporary phase before growth accelerates again. The stock's double-digit dip is considered a good opportunity by these analysts, as it presents an opportunity to buy a good company at a lower price.
[1] Seeking Alpha (2023). Equinix (EQIX) Q1 2023 Earnings Call Transcript. [online] Available at: https://seekingalpha.com/article/4474995-equinix-eqix-q1-2023-earnings-call-transcript
[2] MarketWatch (2023). Equinix stock drops as company lowers growth outlook. [online] Available at: https://www.marketwatch.com/story/equinix-stock-drops-as-company-lowers-growth-outlook-11682224017
[3] CNBC (2023). Equinix cuts growth outlook, sends shares tumbling. [online] Available at: https://www.cnbc.com/2023/05/02/equinix-cuts-growth-outlook-sends-shares-tumbling.html
Investors who are willing to wait patiently may find value in Equinix's stock, given its position to capitalize on the long-term AI-driven market expansion, despite the current slowdown in growth rates. Moreover, the intensified investment requirements for AI functionality may justify the increased capex, providing a potential opportunity for investors to buy a good company at a lower price.
