Equinix (EQIX): Report Q4 After the Bell, We Take A “QIX” Look & Offer New Trade

by Dan February 15, 2012 2:53 pm • Commentary

EQIX ($128.30)   Company Overview  Here

EVENT:  Company reports Q4 tonight after the bell.  The implied move in the options market is about 9.5% vs the 4 qtr avg move of about 5%.

PRICE ACTION/SENTIMENT:  Stock is up 26% ytd and 56% off of the August lows…..This chart is obviously fairly heathly on a long term basis, but near term I would say it is just a tad overbought some 27% above its 200 day moving average.

2 yr EQIX chart from Bloomberg LP

-Wall street analysts are overwhelmingly positive on the stock with 18 Buys, 5 Holds and only 1 Sell and an average 12 month price target of about $136.62.  

-Short interest sits at almost 12% , which isn’t low by any means for a company with a $6 billion market cap,  $1billion in cash, BUT $3billion in debt.

Implied volatility is obviously elevated heading into earnings with 30 day implied vol at about 52, vs the 30 and 60 day realized vol of only about 22 and 26 respectively.


VALUATION: Stock trades at 46x next years expected earnings of about 2.75, which are expected o grow a not to shabby 42%, while sales are expected to grow at about 18%.   While the expected growth warrants a premium valuation, it trades at significant premium to FFIV at 28x this years earnings, and AKAM at 23x.

MY TAKE: this not a company I know well at all, and frankly other than the inputs described above I can’t tell you that I can make an informed decision about their fundamentals……BUT with the stocks recent run, premium valuation and extremely high debt to enterprise value of almost .40 I think I wouldn’t buy this stock with your money…..

Expectations are obviously fairly high heading into the quarter and I would say the stock has to be priced for perfection.  SEE A COUPLE WALL STREET ANALYST PREVIEWS BELOW

MY TRADE:  EQIX ($128.30) Bought Feb/March 110 Put Spread for 1.20

-Sold 1 Feb 110 Put at 1.07

-Bought 1 March 110 Put for 2.27

Break-Even on Feb Expiration:

Stock 110 or higher on Friday close the Febs expire worthless and you own the March for 1.20….

If stock makes a dramatic move lower the difference btwn feb and march is what you make….


BIG DISCLAIMER: options in this name kind of trade by appointment and the spreads are very wide, so you have to use limits and when I bought this the screens were .80 at 1.40 and I bid 1.20 and got filled…. This is not a spread you want to chase price wise.

Also this is by no means a high conviction trade, but Feb vol so elevated I want to take a shot.



Barcap Preview note data Feb 15th  2012:

4Q11 Expectations Recap: Focus on Pricing, Capex Plans, and REIT Conversion Potential

We expect Equinix to report 4Q11 results this afternoon after the close. On the

fundamental side, investors are likely to focus on colocation pricing trends and the

company’s capital deployment plans. We will also be looking for management

commentary on the possibility and the timing of a potential REIT conversion. We

believe the potential for such a conversion has been a material driver for the shares’

strong performance YTD (up 27.2% vs. 7.3% for the S&P 500). Given the strong results

at Telecity (covered by our European team) and Rackspace, we believe the demand for

data center services remains robust, giving us comfort in Equinix’s ability to continue to

successfully execute on its business plan. We recap our key estimates below:

Barclays Capital Forecasts

Revenues: Colocation $318MM (+19.9%), Interconnection $64.4MM (+23.9%),

Managed Infrastructure $23.3MM (+187.6%), Rental $0.8MM (+4.3%), and Nonrecurring

$21.7MM (+14.7%), for a total of $428MM (+24.1%).

Other Key Financials: Adjusted EBITDA $192MM (+29.0%), Capex $173MM

(+20.4%), and FCF ($41)MM.


And here’s BofA’s preview:

2012 Guidance. We expect EQIX to raise ’12 guidance for revenue and adj.

EBITDA. Our ’12 revenue of $1.898b compares to ‘greater than’ $1.87b

guidance and consensus of $1.89b and our EBITDA of $870m compares to

‘greater than’ $850m guidance and the Street at $859m. We expect a bump

in EBITDA guidance to $860m+ driven by solid core growth fundamentals in

the data center segment and a ~60% larger sales force than in early 2011.


Positive industry read-throughs so far. European data center operator,

Telecity, a close peer company to Equinix, reported 2H11 results on Monday

that were ahead of expectations. This is on top of positive industry-level

commentary from Digital Realty at its analyst day two weeks ago and VZ’s

Terremark subsidiary growing 10% sequentially in 4Q.


Currency impacts are minimal. While we do not view currency

fluctuations as a relevant fundamental variable for EQIX given all revenues

and costs are matched, leaving currency as merely an issue of optics, the

impact of these optics is an open question with respect to stock impact.

Approximately 35% of EQIX’s revenue is generated in foreign currencies,

with the Euro and British pound accounting for a combined 21%. EBITDA

exposure is lower as a function of lower margins in Europe and costs being

incurred in local currencies. Relative to EQIX’s ’12 currency guidance, the

Euro has depreciated 4% (13% of rev.) and the Pound has appreciated 0.5%

(8% of rev.). If the currencies were to remain at current levels through 2012,

we estimate approx. a $7m (-0.4%) revenue headwind and $3m EBITDA

headwind (-0.3%) when results are converted to US$ for reporting purposes.


Share buybacks. On November 17, 2011 Equinix announced a new $250m

share buyback, the first in its history, to be completed by the end of 2012.

We view rising visibility into shareholder returns as a positive evolution for the

company, which is characterized by high recurring revenues, a growing cash

flow stream and strong visibility into future demand.


REIT commentary. Given rising speculation that a future REIT conversion

could be a potential option for the company to preserve its near-tax free

status as its NOL tax shield burns off, we would expect the company to

provide an update with respect to its latest thoughts on a future conversion.

According to Equinix, the company is currently analyzing whether REIT

conversion is the right evolution for the company. A link to our note

assessing the potential stock upside from a REIT conversion is attached here