Equinix: Dollars and data

A potential conversion to a REIT could boost the valuation of this data center operator.

By TheStockAdvisors Aug 6, 2012 10:35AM
Image: Silver globe with twinkling lights (© Tetra Images/Getty Images)By Mike Cintolo, Cabot Top Ten Trader

As the online world transfers more data and as more applications are hosted in the cloud, Equinix (EQIX) is sure to benefit.

The stock has been a leader all year, breaking out in a big way in early January, climbing higher for months, and now re-asserting itself on the upside. The reason for the recent renewed strength in the stock was a bullish quarterly report and outlook -- sales rose 18%, with recurring revenue making up 95% of the total.

In addition, cash flow was up 22% from the year-before period and management upped its guidance slightly going forward.

All that tells investors that, despite a sharp economic slowdown, demand for the company's data center space and services (including co-location and interconnection services, which are vital for its 700-plus network service providers) remains strong.

Meanwhile, key metrics -- such as cabinet billings and utilization rates -- are all point up. The gold egg here is the possibility of Equinix converting itself (or part of itself) to a real estate investment trust in the quarters ahead -- something that would lead to huge tax savings down the road.

Such a move would also lead to big dividends and a higher valuation. Currently, Equinix trades at a 15% to 30% discount compared to similar firms that are already REITs.

Technically, EQIX has been choppy since late April, when the stock gapped higher on monstrous volume.

It then etched a six-week consolidation between $145 and $170, but its breakout in mid-June fell flat because of the broad market. It then went on to build another six-week zone, this time from $160 to $180, before gapping higher on earnings last week.

The stock has slipped since after an analyst downgraded the shares based on valuation. But to us, the stock still appears to be in good shape. If you don't own any, we think picking up shares around here makes sense, with a stop in the high $160s.

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