Sales Growth and Pricing Power Strong at Equinix, but Margins Under Pressure

Equinix’s EQIX fourth-quarter revenue was generally in line with our expectations, while margins came in a little bit weaker than we forecast. The firm’s 2023 outlook paints a similar picture of solid revenue with weaker margins, but the sales outlook was well ahead of what we expected, as the firm is raising prices. With the effects of hotter sales and cooler margins largely offsetting each other, we are raising our fair value estimate only slightly, to $580 per share from $570.

Demand in Equinix’s data centers remains robust, leading to 11% year-over-year constant currency revenue growth in the fourth quarter and an outlook for 12%-14% sales growth in 2023. On Jan. 1, the firm raised prices on its customers to pass through higher power costs in its data centers. Aside from the sales boost from higher prices, which we see as an indication of the quality and competitive advantages of the company’s data centers, Equinix continues to benefit from high demand. Management said that it had one of its best booking quarters ever and has the largest development pipeline it has ever had. The firm also added four new cloud onramps to further extend its wide industry lead; with an addition in Mumbai, Equinix now has 12 markets with cloud onramps from each of the top five cloud providers. We think this is the most critical piece that underpins the network effect in Equinix’s ecosystem and will allow the company to maintain the growth it has experienced over the past decade.

While the sales outlook generates excitement, margins remain under pressure. Adjusted EBITDA margin dipped below 45% in the quarter, the first time below that threshold since 2014 and nearly a 150-basis-point drop from last year’s fourth quarter. We believe higher power costs are the biggest culprit, but management’s guidance indicates price increases won’t offset the higher prices in the near term.