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  • Writer's pictureMatt Wolodarsky

A Smart Dividend Play in the AI Era: Why Equinix Stands Out

With the global economy rapidly adopting generative AI (GenAI), the demand for robust digital infrastructure is set to soar. Equinix (NASDAQ:EQIX), a global provider of data center and digital infrastructure solutions, is set to play a pivotal role in supporting the rollout and scaling of GenAI technology. The Real Estate Investment Trust's (REIT) positioning in the growing AI ecosystem as a picks and shovels provider not only promises significant growth potential but also offers investors the appeal of a sustainable and fast growing dividend.


We are in the early innings of a massive scale-up in data center capacity to meet the explosive demand for GenAI. Microsoft is a prime example of this trend, planning to triple its datacenter capacity within the next year to accommodate its customers growing AI needs. Amazon plans to spend almost $150 billion in the coming 15 years on data centers. On a broader scale, industry forecasts indicate a significant leap in global data storage capacity - from 10.1 zettabytes (ZB) in 2023 to 21.0 ZB in 2027, reflecting compound annual growth of 18.5% [Source: IDC, Revelations in the Global StorageSphere, July 2023].



To grasp the GenAI opportunity for Equinix, it's essential to explore the driving forces behind the rising demand for the company's infrastructure data center capacity. The allure of AI lies in its potential to drive economic growth through significant productivity enhancements across various sectors. Leading companies like OpenAI, Meta, Microsoft and Nvidia are at the forefront, training sophisticated GenAI models. As these models scale up in complexity and capability, they require increasingly massive amounts of computing power, energy and data. The more compute resources—like processors and GPUs—that are devoted to training a GenAI model, the more sophisticated and powerful the model can become, pushing the boundaries of what it can achieve across various applications. This escalating cycle of compute needs makes expanding and enhancing data center infrastructure a critical priority for society.


Once a GenAI model is trained, it moves into the inference phase, where it uses its training to generate unique responses to new inputs. This stage is more about quick and efficient application of what the model has learned, rather than the intensive learning process involved in training. Think of it like the difference between learning how to solve math problems in a classroom setting (training) versus quickly working through a set of problems on a test that you've already been taught how to solve (inference).


Equinix is well positioned to shine in both phases of model training and inference. The company's large-scale xScale data centers are ideal for the intensive computational needs of AI training. For the inference phase, Equinix’s IBX retail data centers are optimally located near end-users, while also providing the necessary robust connectivity services. This proximity and connectivity are crucial for high reliability and low latency inferencing of advanced models at scale.


The company's CEO has signaled this dynamic playing out in previous earnings calls:


"We've closed several key AI wins over the past few quarters and are seeing a growing pipeline of new opportunities directly and with key partners for both training and inference use cases that benefit from the unique performance characteristics and multi-cloud proximity of our platform."

Despite some criticisms of Equinix for its heavy reliance on major cloud service providers like Amazon, Microsoft, and Google, the company has managed to thrive. This dependence on the cloud giants does expose Equinix to potential pricing pressures, as they are somewhat at the mercy of these market makers. However, even with this vulnerability, Equinix has managed to deliver market beating returns, boasting an impressive annualized stock increase of over 17% throughout a decade marked by significant cloud expansion. Now, as the era of artificial intelligence dawns, Equinix stands on the brink of another potential decade long growth period, ready to leverage AI as the next major catalyst for its development.

 

One unique area of the AI market that Equinix is well positioned for, and will help mitigate against an over dependance on the cloud megas is their Private AI offering. Delivered in partnership with the AI leader Nvidia, Private AI helps organizations unlock the power of AI while maintaining control of their data. Customers can deploy Private AI with Platform Equinix to protect their proprietary data, reduce regulatory risk, and optimize performance. As the CEO recently explained on CNBC customers are looking to use Equinix's Private AI offering to keep their data private and secure, while close to the major cloud providers (e.g., Amazon, Microsoft, Google) who are offering AI technology to reason over a company's proprietary data. There appears to be some early wins highlighting the need for Private AI, making this offering and their partnership with Nvidia an area to monitor for future growth.


Equinix powers its new Private AI offering with a vast network of dense data centers located in major cities worldwide. These facilities are equipped with the necessary infrastructure to enable direct connections between network providers, customers and cloud providers, a competitive edge that is difficult for others to match. Equinix leads globally with the most cloud on-ramps, providing customers and cloud providers with lower latency and enhanced security. The high number of network providers that converge at Equinix data centers creates a virtuous cycle: more network providers attract more customers, which in turn attracts more cloud providers seeking access to the greatest number of customers that connect to cloud providers via cloud on-ramps. This synergy fosters a network effect, optimizing data traffic rates for network providers and drawing more customers to Equinix, further strengthening its market position.


Equinix has a strong track record of growth, profitability and financial stability.


Equinix boasts a robust financial position, highlighted by a net debt to adjusted EBITDA ratio of 3.4 at the close of 2023, the lowest among its major data center competitors. Although this debt level might seem high for a typical company, it's typical for REITs to have higher debt burdens. Equinix comfortably manages this thanks to its strong cash flows.


Thanks to this consistent profitability, financial stability and and well managed balance sheet, Equinix has been able to grow its dividend at an aggressive rate. Equinix has increased its dividend for 10 straight years, since it became a REIT. As a REIT, Equinix is obligated by law to return 90% of its taxable income to shareholders via dividends. It has grown its dividend at an astonishing 12% annually over the last five years. The stock currently sports a 2.13% dividend yield and appears to be quite safe with the current payout just 54% of funds from operations (a REIT's profits). Investors should look for more increases as AI tailwinds continue fueling consistent growth at the company.


Valuation

Based on Morningstar's fair value estimate of $710, one could argue Equinix is only slightly overvalued relative to the current share price of $766 (as of May 24th, 2024). This is down from its 52 week high of $914, a drop that was instigated off a disproven short seller allegation of improper accounting policies. Given my expectation for the long-term tail winds being strong and my strategy to hold for an extended period, I'm not seeking the ideal entry price to begin a position.


Bottom line

Equinix represents a compelling investment opportunity due to its strategic role in supporting the expansive growth of generative AI technology, a robust infrastructure that enables rapid scaling and efficiency, and a solid financial foundation promising sustained dividend growth amidst AI-driven market demands.


I have added a position in Equinix to the Wealthy Owl Dividend Growth portfolio and as of this posts publish date (May 27th, 2024) its stock price is $766.12.


As with any investment decision you make it’s important to complete your own due diligence and assess if the investment matches your risk profile. Like any individual stock there is risk. You are entirely responsible for your own investment decisions.



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