When looking to invest in data centers and AI, there are a lot of potential routes to go down. These include hyperscaler firms, advanced semiconductor designers, AI app developers, and semiconductor equipment makers.
[content-module:CompanyOverview|NASDAQ:EQIX]However, another potential avenue is data center real estate investment trusts (REITs). These firms provide much of the physical infrastructure needed to house advanced computing resources and further AI. Currently, two REITs dominate this space: Equinix (NASDAQ: EQIX) and Digital Realty Trust (NYSE: DLR).
These firms provide critical infrastructure, help supplement the capacity of data centers wholly owned by hyperscalers and other enterprises, and generate substantial dividend income.
Equinix and Digital Realty, respectively, have dividend yields of 2.3% and 3.3% as of the Apr. 1 market close. These yields are very significant compared to the general technology sector. The Technology Select Sector SPDR Fund (NYSEARCA: XLK) has an indicated dividend yield of just under 0.8%.
Below is an analysis of Equinix, the largest data center REIT by market capitalization. Does it have the potential to be a compelling investment going forward, with shares down 18% from recent highs? Additionally, what kind of upside do Wall Street analysts see in this name?
Breaking Down Equinix’s Place in Data Centers
Equinix's revenue primarily comes from two sources: colocation and interconnection. In 2024, 74% and 19% of the company’s revenues came from these sources, respectively.
Colocation is essentially a service where companies can rent out space in Equinix’s data centers. Within this service, Equinix provides "all the components required by a customer to house its IT infrastructure or equipment."
This means that Equinix does not provide advanced chips or other computing components itself. Instead, it offers a home where customers can place and use the equipment they purchase. This is significant, as it greatly reduces Equinix's costs of supplying these components itself.
The company also provides the power needed to run these systems, making electricity one of its largest costs. Last quarter, utilities made up 27% of the firm’s cash operating expenses. Interconnection services link data centers with each other or to businesses. The company has two types of data centers.
The first is the International Business Exchange (IBX) data center. These are for general cloud computing purposes. The second is its xScale data centers. Equinix designs these to serve “a targeted group of hyperscale companies." They specifically support demanding cloud and AI workloads. These data centers are what have many excited.
Equinix’s xScale Upside
Currently, Equinix’s xScale data centers make up less than 10% of its data center portfolio. Due to this, the firm has a massive opportunity to grow these offerings and generate significantly more revenue from hyperscale customers. The company is investing to do just that.
The firm is currently developing 16 xScale data centers that it expects to open by Q1 2027 or earlier. In terms of energy usage, these projects will increase the firm’s xScale capacity by 62%. The company has leased or pre-leased 85% of its current and coming capacity.
This shows the rapid demand for these facilities, even though many are far from completion. The xScale ramp-up represents a big chance for Equinix to accelerate revenue and earnings growth.
Additionally, many software companies are making big efforts to push access to their products to the cloud. This helps firms update their apps easily and create more recurring revenue. This should continue to increase demand for Equinix’s services, which is another big tailwind benefiting the firm.
Price Targets Indicate Significant Potential Undervaluation in EQIX
[content-module:Forecast|NASDAQ:EQIX]Wall Street analysts are demonstrating notable bullishness about Equinix's potential. MarketBeat has tracked five price target updates for Equinix since the beginning of March. On average, their price targets imply a 20% upside in Equinix shares compared to their Apr. 1 closing price.
This is significant, considering analysts frequently view a 20% upside as a line of demarcation. Many believe that less than 20% upside is not enough to reasonably consider a stock undervalued. However, perspectives on this vary.
Overall, Equinix is a large and expanding firm that looks set to benefit from big trends toward cloud computing and AI. The stock represents a unique and interesting opportunity to capitalize on these trends while also providing significant dividend income. The stock’s recent fall helps its case going forward.
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