Why Are Hedge Funds Buying Equinix?

Aug.22.12 | About: Equinix, Inc. (EQIX)

By Brian Tracz

Equinix Inc (NASDAQ:EQIX) provides a variety of data services to its clients and operates in 38 different markets around the world. Of particular interest, Equinix Inc has a large stake in the increasing demand for cloud computing infrastructure. According to 13F filings for the second quarter 2012, the number of hedge funds with positions in the company rose to 47 from 37 in the first quarter. The stock is up 132 percent year-over-year, and we wanted to take a look at the recent success of this company.

Laffont's remarks. We like Philippe Laffont's ideas on Equinix and on the tech sector in general. He stresses the importance of cloud computing and the "post-PC" age in his tech-weighted Coatue Management portfolio. Laffont remarked at the Ira Sohn conference this year that Equinix was "a great story" and that the company has the internet equivalent of "beach-front property," winning bids for peer points when their importance was not yet widely known. As with Apple (NASDAQ:AAPL), Laffont thinks that Equinix might do better than triple in value.

Expensive valuation... The valuation is, to add a tone of restraint, completely growth-centered. Shares are trading at 49 times 12-month consensus forward earnings, which is well above the sector's average of 14 times earnings. Based on other valuation metrics as well, the company does look expensive.

… because of excellent growth prospects. Struggling internet and technology companies like Facebook Inc (NASDAQ:FB), Groupon Inc (NASDAQ:GRPN), and Hewlett-Packard Company (NYSE:HPQ) are providing tech-centered investors with a lot of insight into the future of the broader sector. Facebook is struggling to convince investors that it can continue growing ad revenues, and Groupon's investors are slowly discovering that this faddish advertising firm is losing market share (53 percent in the second quarter) in a comparatively static market. Hewlett-Packard is soul-searching to find its niche and its sources of competitive advantage.

These problems simply do not plague Equinix. The company connects over 4,000 cloud computing networks, digital content sources, and financial firms worldwide. According to its annual report, the company counts among its customers Microsoft Corporation (NASDAQ:MSFT) and Google Inc (NASDAQ:GOOG), who maintain their own data centers but rely on Equinix to provide connection between different server farms. Management notes that data-rich media will increase bandwidth usage and demand, which will also lead to increased need for data center upkeep-including cooling services and disaster recovery. The company also expects large growth in the financial industry's reliance on electronic trading and in the adoption of cloud computing services.

Equinix is an internet "sine qua non." The internet needs this company. The internet is a network of local networks, so there needs to be a physical connection between, say, two e-mail services in order for e-mails to be distributed from one service to another. Equinix provides the physical infrastructure for this transaction. Its clients are able to connect to more than 90 percent of the total internet pathways that exist worldwide.

Positive secular internet trends. By viewing Google's internet usage growth rates (data from World Bank), it is easy to see the extent of the worldwide increase in internet usage, particularly in China. China itself-a country more than four times as large as the United States-is seeing the same internet usage boom that the United States underwent in the mid- to late-1990s. Equinix does business in East Asia and in South America, two critical markets. Short-term economic concerns might scare away investors looking for quick returns, but Equinix has attractive long-term growth prospects.

The company's consensus earnings estimate for 2012 is $2.68, and this is expected to grow to $3.86 in 2013. Hedge funds seem to agree with Laffont that this company is a tangible to the internet and, assuming a positive outlook in 2014, a potentially booming growth stock.

Disclosure: I am long AAPL, GOOG, MSFT.

Business relationship disclosure: This article is written by Insider Monkey's writer, Brian Tracz, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.