This Cloud Company is Primed for a Pop

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The main advantage of investing in REITs is that the IRS requires them to pay out at least 90% of earnings to their shareholders. Companies abiding by this rule are exempt from taxes. Many companies are opting for REIT status in order to offset their slowing growth. Data center providers Digital Realty (NYSE: DLR), DuPont Fabros and CoreSite Realty, already have an REIT status. Digital Realty has a payout ratio of 196%, while its peers have 200% plus payout ratios. In an industry of cut throat competition, cost savings matter, which is why Equinix (NASDAQ: EQIX) has also applied for REIT status.

Money Saved is Money Earned

Equinix is the world’s largest data center provider, servicing more than 4,000 companies and service providers. The company has a market capitalization in excess of $9 billion, and has a presence in 38 markets across 13 countries. The US markets accounts for 60% of the company’s total revenues. Once the REIT status is approved, the company expects annual savings of $700 million to $1.1 billion, which would be paid out to the shareholders via special distributions.

Solid Financials

In the recent quarterly results, Equinix reported revenues of $488.7 million, up from $408 million year over year. Net income rose to $29.2 million from $20.64 million, which is a massive 41.4% increase. The results beat both the Street’s and the management’s estimates, and its shares are up 96% YTD. The cloud market is saturating, and cloud-based companies are cutting down their annual guidance, but the management at Equinix improvised on its guidance despite the current headwinds.

Expansive Drive

Due to expansion activities, its gross capital expenditures stood at $212.1 million, and the company expects the financial benefits of these acquisitions to begin with 2013. Some key events of 2012 are mentioned below:

  1. Acquired Ancotel GmbH ($21.4 million revenues in 2011), which is a leading provider of carrier neutral co-location network allowing.
  2. Acquired Asia Tone for $230 million, allowing Equinix to expand in Hong Kong.
  3. Acquired International Business Exchange, which allows the company to expand in Dubai.
  4. Spent $39.4 million for the expansion of its data center in Sydney. 

Beating its Peers

<img src="" />

EQIX data by YCharts

In 2011, Equinix and RackSpace Hosting (NYSE: RAX) co-developed OpenStack (open source cloud platform), which gave them a competitive advantage over proprietary cloud service providers. OpenStack offers more flexibility to its customers at a lower cost. Also, if a customer is not satisfied with his service provider, he can simply switch to another service vendor. The new vendor can simply customize the offerings of the previous service provider, which is one of the benefits of open source software.

Foolish Takeaway

Due to the expansions, we can safely expect a stronger top line in 2013. Also, since OpenStack is fairly new, the adoption of its open source software is nowhere near saturation. Though major names like Yahoo!, Intel, and AMD have adopted it, there is still a massive room to grow as just over 150 businesses around the globe are using OpenStack. Also since Equinix has applied for REIT status, annual cost saving of over $1.1 billion would unlock massive shareholder value for this $9.55 billion company (market cap). I believe that investors should pound on this stock, as 2013 appears to be a big year for the company.

PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Rackspace Hosting. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus