If you want income from your cloud investment, but still want cloud exposure, consider Equinix (NASDAQ:EQIX) stock.
Just be prepared to pay a cloud price for it.
Equinix is a data center real estate investment trust. It builds or buys data centers with debt or equity, and profits go directly to shareholders. The data centers connect its customers to public clouds, as companies evolve them into private clouds.
Equinix opened Jan. 12 at $682/share. That’s a market cap of $61 billion, on estimated 2020 revenue of $5.8 billion. The dividend yields a paltry 1.56%. But it can still pay off for conservative investors. Here’s why.
REIT on Sale
While other real estate investment trusts, or REITs), which are designed to deliver income, have been crashing in 2020, Equinix rose 17% over the last year. That dividend with the tiny yield has also doubled over the last five. If you bought the stock five years ago, when it was at about $300, your current yield is 3.5%. You have also gotten an average 25%/year in capital gains.
Right now, Equinix is on sale. The shares peaked at almost $830 in early October. They continued heading down after it beat estimates for the third quarter. They’re down about 22%.
There was a similar dip between late 2018 and early 2019. The 2018 peak, before the trough, was at $430/share. If you just held it, and held through the last downturn, you’re still up 58%.
It’s the difference between investing and trading.
REITs like Equinix also play a vital role in the cloud ecosystem.
When a market is too small, or too risky, for an Amazon (NASDAQ:AMZN) or Microsoft (NASDAQ:MSFT) “hyperscale” data center, REITs fill the gap. Equinix is currently putting $136 million toward increasing its footprint in Brazil. It just paid $161 million for two data centers near Mumbai, India.
In addition to creating new edges for the cloud, Equinix also fills in at major cloud centers. It is building its fifth center in Singapore, where demand is growing fast. It’s putting a third center in Osaka, Japan,and yet-another center near Washington, D.C., which has become the cloud’s true center. The cost of building an Equinix center looks similar to a Costco Wholesale (NASDAQ:COST) warehouse.
Equinix remains on the hunt for new acquisitions, evidenced by its $780 million purchase of the former Bell Canada’s 13 Canadian data centers.
There are also tailwinds in the cloud’s evolution. Equinix will soon be putting as much energy into the electric grid as it takes out. It supports the move of data creation to the network edge. Equinix also plans to use partnerships to drive its cloud-edge deeper into factories and cities, supporting the Machine Internet.
All this means Equinix can provide “bare metal” cloud services without directly competing against Amazon, because they’re delivered close to customers. Equinix connectivity now supports all major clouds, both American and Chinese. It supports cloud leaders like Alphabet (NASDAQ:GOOG) and Alibaba Group Holding (NYSE:BABA) and cloud wannabes like Oracle (NYSE:ORCL) and IBM (NYSE:IBM).
The Bottom Line
The pandemic didn’t leave the data center REITs unscathed. Equinix figures it added $20-30 million to its costs.
The point is these are short-term hiccups. Over the last five years EQIX stock delivered total returns of 170%. Equinix is the largest player in its field, worth $25 billion more than Digital Realty Trust (NYSE:DLR), and eight to 10 times more than smaller rivals.
EQIX stock is still expensive compared with other data center REITs, but it continues to deliver great returns. The wind is at its back, as the cloud expands around the world and the machine internet age begins.
Buy it and ignore it. Put some away and see me in five years. I think you’ll be smiling.
On the date of publication, Dana Blankenhorn owned shares of AMZN, MSFT and BABA.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.