Equinix: A Beaten Down Blue Chip Now In Bargain Territory (NASDAQ:EQIX) (2024)

This is one of the most unique market environments that I've ever witnessed.

If you look at a market heat map on most days, you'll see a few big green blobs (represented by high-flying tech stocks) while the rest of the market bleeds red.

The S&P 500 is up by 13.92% on a year-to-date basis. That's great, right?

Sure, if you're content owning overweight stakes in the parts of the index that are working (namely, big-tech stocks and semiconductor names that are rallying on the back of AI momentum).

But, if you're someone like me, who likes to stay well diversified and fancies an area of the market (real estate) that has been left behind by the AI hype train, then you're likely underperforming.

Remember, the S&P 500 is a market capitalization weighted index, which means that the largest stocks will have an outsized impact on performance.

The S&P 500 equal weighted index is only up by 4.5% on a year-to-date basis, showing how narrow the breadth of the 2024 rally really is.

Only 125 out of the 503 stocks in the S&P 500 are outperforming the index's 13.9% returns right now.

Looking at the top 10 positions from the SPDR S&P 500 ETF Trust, you'll see that nearly all of them (except for Apple) have outperformed this year.

These are the stocks driving broad market returns.

But, I don't think this narrow rally will last forever.

Eventually, unloved sectors of the market will come back into favor.

Mean reversion has been playing out in the market since its inception and eventually, strong fundamentals will trump poor sentiment surrounding non-tech (and especially, interest rate sensitive) stocks.

For instance, I continue to believe that most blue chips REITs look like coiled springs at their current valuations and whenever the Fed pivots dovish, I expect to see a major rally from the real estate sector.

But, maybe you're in the higher-for-longer camp and don't believe that this thesis will play out in the near-term. Well, that's okay. One of my favorite beaten down REITs is benefitting from the same secular tailwinds that are driving the big-tech/AI rally right now and today, I want to talk about this opportunity…

Equinix (NASDAQ:EQIX), the world's largest data center REIT, is down by 5.5% this year and this share price weakness, combined with Equinix's continued fundamental growth, has pushed EQIX shares down into value territory.

Equinix: Company Overview

If I told you that there was a company that was mission-critical to the world's largest companies, making all of the hyperscaler's dreams in the digital world come true, while generating high profit margins with the majority of its revenues coming from recurring deals…you'd assume this one be a hot stock in the 2024 market environment, wouldn't you?

Well, that's exactly what Equinix is. But, its stock price is lagging.

Equinix is a data center REIT with a global footprint, serving all of the major high-tech markets in the world with 99.99% reliability.

As its management team pointed out during its most recent earnings report, not only does EQIX benefit from size and scale that set it apart from its industry peers, it also benefits from some of the world's most powerful secular growth trends.

Equinix has been a trusted partner of the popular big-tech companies for years. And now, this company dominates market share in the cloud space amongst all of the largest hyperscaler customers.

The company's financial results prove this secular growth thesis correct.

EQIX has posted top-line growth during 85 consecutive quarters.

That's a perfect sales growth record over the last 21 years (and counting).

And it's not just EQIX's top-line that has been growing. Its cash flows, adjusted funds-from-operations ('AFFO'), and dividend have been compounding higher for years as well.

This growth streak isn't expected to end anytime soon, either.

Wall Street consensus AFFO growth estimates for Equinix in 2024, 2025, and 2026 are 9%, 7%, and 9%, respectively.

What's more, during its Q1 report, Equinix's management provided a positive outlook for dividend growth as well.

EQIX is currently on an 8-year dividend increase streak, with a 5-year dividend growth rate of 11.3%.

The stock yields 2.24% today and while that's relatively low, compared to the rest of the REIT sector, I love the growth potential here and there's absolutely nothing wrong with owning a 2%+ yielder that is compounding its dividend higher at such strong double-digit rates.

Lastly, I should note that EQIX has a BBB-rated balance sheet, making it an investment rated company by S&P Global.

With all of this being said, EQIX checks all of my quality-oriented boxes. Therefore, it shouldn't come as a surprise to know that Equinix has an industry leading 90/100 in our quality score.

Valuation

A little over a year ago, EQIX shares were trading for north of $900/share.

At that point in time, trading for 28x AFFO or so, I think it was clear that shares were overvalued. However, today, after falling more than 15% to the $765 area, I think EQIX's valuation is painting a different picture.

As you can see, Equinix is now trading for less than 23x AFFO.

Today's 22.79x blended P/AFFO ratio is below the stock's 10-year average P/AFFO ratio of 22.59x.

Furthermore, it's well below the stock's 5-year average P/AFFO ratio of 25.4x.

Due to EQIX's strong AFFO growth expectations, these shares are even cheaper on a forward basis.

Today, EQIX is trading with a 21.9x forward P/AFFO ratio (based upon the current consensus AFFO estimate for 2024 at $35.00/share).

I think EQIX is a bargain here at less than 22x forward.

If Equinix generates the high single digit AFFO growth that we expect to see and sees multiple expansion back up towards that 23.6x 10-year average area, then we're looking at a double-digit total return CAGR over the next several years.

And, if EQIX's P/AFFO multiple happens to rise back up to the 5-year average in the 25x area, then we're talking about a total return CAGR of 15% or so over the next 2-3 years.

Conclusion

Out of favor or not, I love having the opportunity to buy a blue chip like Equinix with double-digit total return upside.

As I said, this company is one of the most reliable compounders in the entire market when it comes to growing revenues.

EQIX has a long history of bottom-line success as well, which has translated to a rapidly growing dividend over the last decade or so.

This fundamental growth is what allows me to sleep well at night when thinking about a long EQIX position, despite macro uncertainty surrounding interest rates.

And, looking at the strength of the cloud/AI tailwinds still driving demand for data center space higher, I think that this is a stock that can continue to post strong top-line, bottom-line, and dividend growth for decades to come.

So, I'm excited about the opportunity to buy shares down 15%+ from recent highs. Equinix has only been cheaper than this a few times during the last 10 years. These are the moments that I love to take advantage of.

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