Buy Equinix To Play Growing Demand In Data And Network Traffic

| About: Equinix, Inc. (EQIX)

Equinix (NASDAQ:EQIX) recently announced that its data center in Hong Kong has been chosen by RTS Realtime Systems Group. Realtime, which is a leader in providing electronic trading software as well as risk management solutions, is in the process of expanding its operations in Asia and has selected Equinix to provide data center solutions. Equinix's data center will serve as RTS's solution to providing trading solutions in the Asia-Pacific region. The data center will be linked to the company's global network which provides market access to over 60 exchanges worldwide. RTS's clients depend on its network for high speed access to various asset classes, and with access to Equinix's data center, its clients can have easy access to major exchanges around the world.

This latest development is another milestone for Equinix, not only because it further cements the long standing strategic relationship with RTS, but also because it further enhances its presence in Asia, a region with tremendous growth potential. Over the last few years, Asia has been a particularly lucrative market for Equinix as it is one of the fastest growing economies in the world and, according to the International Monetary Fund, Asia will continue to be the global growth generator going forward, despite the cut in the recent growth forecast of the region.

The company is also expanding its presence in Europe, recently announcing that its international business exchange data center in Amsterdam is fully functional. With access to its data center, its clients will be facilitated through access to the entire continent from a single location. The said data center is one of the most innovative facilities around. It uses thermal energy storage in the ground instead of mechanical cooling, which will eventually lead to energy savings. The data center has a capacity for 2800 cabinets.

Demand for its services has surged over the last few years, as various businesses, ranging from financial institutions to telecom companies, have increased their reliance on EQIX to manage their traffic and mobile applications. Moreover, the company has recently announced that it has approved a plan to obtain REIT status. Conversion to REIT, which is expected to take place in a few years, would make the company particularly attractive for dividend income seeking investors. Currently, Equinix does not pay out dividends, but after operating as a REIT, the company will distribute 90% of its taxable income to shareholders.

Equinix is a growth story, and the trend is likely to continue going forward as a result of growth in data and network traffic. Moreover, its growth has reflected positively in its financials, which have improved consistently over the recent quarters. Since the financial year ended 2009, the company's revenues have grown by over 30%, which has also resulted in the expansion of its gross margin. In the second quarter, the company posted a gross margin of 50%, up from 45% in the second quarter of the previous year. It is also one of those companies that have been able to boost their bottom line alongside growth in the top line. EQIX's earnings grew by 19% in Q2 2012, and in the next five years, earnings are expected to grow by approximately 30%, which is well above the industry growth of 15%.

We are bullish on EQIX based on high demand for its services going forward as well as the expansion of its data centers in high growth regions. Its conversion to REIT can be identified as another catalyst for the stock. If it gets classified as a REIT, it will have to distribute a certain amount of cash flows to investors in the form of dividends. Another benefit would be tax exemption. Investors can start viewing the stock as a dividend play rather than just a growth story - a combo really rare these days. EQIX is trading at 48 times its forward earnings, which is high, but at a significant discount (47%) to the historical levels that the stock has traded at. Since our last report, the stock is up 12%, and we see further growth based on the reasons mentioned above.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Telecom Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.