Slightly Out of Equilibrium
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
By the time they are finished with their current phase of expansion, data center specialist Equinix (NASDAQ: EQIX) will have resources in 50 of the most internet trafficked locations in the world. They have 104 data centers in 38 locations in the U.S., South America, Europe, Asia and the Pacific Rim. To facilitate their growth plan they have gone on an acquisition spree; buying both Asia Tone and Ancotel in May. Asia Tone expands their presence in Hong Kong while Ancotel is located in Frankfurt.
In Equinix’s business milliseconds count, and they count for a lot. Which is why Amazon (NASDAQ: AMZN) partners with Equinix to integrate their web services with Equinix’s corporate cloud services to create a reliable and fast connection for their clients.
Slinging Data Through Singapore
Equinix is rapidly expanding their presence in Southeast Asia by doubling the number they have in Singapore to four, while making it a major hub for a number of their solutions, notably their services in support of financial systems, Platform Equinix. To keep up with the demand for cloud services in Singapore’s densely populated and advanced ICT networks, Equinix is spending another $28.5 million to upgrade their number 2 data center there.
By buying Asia Tone they immediately expand their presence in the three most important markets in Asia: Singapore, Hong Kong and Shanghai, upping the number of data centers in their arsenal to 104 up from 98.
Too Much of a Good Thing?
There’s no doubt that data storage and retrieval is becoming more and more important as the web takes on greater significance in the day to day operations of our businesses. With the coming rise in full cloud delivery to thin client terminals through products like VMWare (NYSE: VMW) and Microsoft’s (NASDAQ: MSFT) Azure of everything from media to applications, the location of your data will be as important as who has it and how secure it is.
In many ways we are coming back around full circle. The end game for the cloud today will be a return to the old days of client/server architecture. I wonder if the old engineers at DEC and IBM are looking down from on high and smiling. It is for this reason that investors are over the moon at the potential for Equinix. After building a base around $100 per share for more than a year, the stock has been on a tear in 2012 up more than 60% and is now trading at a multiple of 89 with a projected P/E of 64. In order to finance this expansion they have taken on a lot of debt, $3 billion to be exact or 144% of equity, which is currently consuming 12% of quarterly revenue.
The good news is that the most recent quarter saw margins increase back over 7% and net cash flow was positive. While it is hard to bet against the growth of data flow in this world, in the current deflationary environment growth stocks trading on a mix of momentum and potential carrying a lot of debt can be a dangerous scenario.
Waiting for the next earnings report, due in late July, is likely prudent at this point. This is a great potential investment that may need time to justify its current lofty valuation at a time when there are other good plays in the same sector throwing off not only earnings, but huge cash flow and yield to cushion any downside risk.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Microsoft. Motley Fool newsletter services recommend Amazon.com, Microsoft, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.