A Real-Time Case Study: Equinix

This article is authored by MOI Global instructor Elliot Turner, Managing Director of RGA Investment Advisors, based in New York.

We are excited about one of our new additions, for how we think this purchase elucidates our philosophy, process and discipline—Equinix, Inc (Nasdaq: EQIX).

We first learned of Equinix years ago and as many were wont to do, we dismissed the stock as merely another data center marketing itself for having recurring revenue while the primary asset depreciated rapidly and required constant replenishment. Slowly our view became more informed as we spoke with various investors and industry participants. The key factor that influenced our desire to truly dig in on in this company was the suggestion to read Tubes: A Journey to the Center of the Internet by Andrew Blum, in late 2015. We featured this as one of the “Best books we read” in our year-end 2016 commentary.^[1] The central thesis of Tubes is that despite the Internet appearing rather abstract and terms like “the cloud” seemingly implying the Internet itself exists in the air, the entire edifice is built on a highly tangible, physical infrastructure that is essential to global connectivity.

Blum offered some of the following background on Equinix:

• “Adelson relied on a crucial hunch about how the structure of the Internet would evolve: networks would need to interconnect at multiple scales. They had to not only occupy the same building but the same building in several different places around the world.”^[2]
• “The “ix” in Equinix indicated an “Internet exchange”; the “equi,” their intent of being neutral and not competing with their customers.”^[3]
• “Adelson loved that idea: that an engineer responsible for a global network would feel at home in Equinix facilities everywhere. There are about one hundred Equinix locations around the world and all of them carefully adhere to brand standards, the better to be easily navigable by those nomads in endless global pursuit of their bits. Ostensibly, Equinix rents space to house machines, not people; but Adelson’s strikingly humanist insight was that the people still matter more. An Equinix building is designed for machines, but the customer is a person, and a particular kind of person at that. Accordingly, an Equinix data center is designed to look the way a data center should look, only more so: like something out of The Matrix. “If you brought a sophisticated customer into the data center and they saw how clean and pretty the place looked—and slick and cyberrific and awesome—it closed deals,” said Adelson.”^[4]
• “The rationale for an Internet exchange is straightforward, and not very different from the founding principle of MAE-East: get your packets to their destination as directly and cheaply as possible, by increasing the number of possible paths.”^[5]
• “The two most used criteria are the amount of traffic passing through the exchange (both the peak at a given instant, or on average), and the number of networks that connect across it. In the United States, exchanges tend to be smaller; mainly because Equinix has been so successful in allowing networks to connect directly to each other. The big IXs, in contrast, rely on a centralized machine, or “switching fabric.””^[6]

Following our intrigue, we did considerable work on Equinix. Our model suggested the price was fair and offered some upside, though not quite enough. Meanwhile the stock headed higher with hardly a pullback. As this happened, we remained current on the business and kept updating our thesis accordingly. We developed this hope that given Equinix’s prominence in REIT indices (it’s structured as a REIT) it would hit a growth hiccup concurrent with an uptick in rates and a yield-induced panic in yield sensitive sectors. As luck would have it, the confluence of negativity struck Equinix in the first quarter of this year, with investors in yield-sensitive stocks running for the exits. Equinix investors started fearing a slowdown in the long-term growth rate of the company due to “hyperscale” providers building more of their own infrastructure and comments alongside their first quarter earnings report that suggested indigestion of the Verizon assets acquired in Miami.

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Past performance is not necessarily indicative of future results. The views expressed above are those of RGA Investment Advisors LLC (RGA). These views are subject to change at any time based on market and other conditions, and RGA disclaims any responsibility to update such views. Past performance is no guarantee of future results. No forecasts can be guaranteed. These views may not be relied upon as investment advice. The investment process may change over time. The characteristics set forth above are intended as a general illustration of some of the criteria the team considers in selecting securities for the portfolio. Not all investments meet such criteria. In the event that a recommendation for the purchase or sale of any security is presented herein, RGA shall furnish to any person upon request a tabular presentation of:
(i) The total number of shares or other units of the security held by RGA or its investment adviser representatives for its own account or for the account of officers, directors, trustees, partners or affiliates of RGA or for discretionary accounts of RGA or its investment adviser representatives, as maintained for clients. (ii) The price or price range at which the securities listed.