Data centers are witnessing record leasing levels, and demand from cloud providers is expected to grow significantly, Goldman Sachs’ Jiorden Sanchez said in a report. He initiated coverage of Equinix Inc EQIX with a Buy rating and a price target of $435. The analyst named the stock as a top pick, citing secular growth and compelling total returns.
Stocks of data centers have recently outperformed, with the broader group up 41 percent year-to-date, versus a 3 percent gain in the S&P. The group has been witnessing record leasing levels, due to growing demand from cloud providers. Analyst Jiorden Sanchez believes there is “a long runway for demand from cloud providers (with the industry still in the early stages of the capacity investment cycle),” while citing incremental leasing opportunities from enterprise.
Upside Versus Market Expectations
Sanchez noted three areas of upside for Equinix versus Street expectations:
- Shift to hybrid cloud: The enterprise TAM is estimated at $7bn TAM, versus the current enterprise revenue of $400mn. “Ecosystems pull in those seeking access to multiple clouds, driving a 2x increase in enterprise revenue by 2020,” the analyst wrote.
- Swifter margin uptick: The company’s core margins could be 100-200bps above the 2016 guidance of 46 percent. “We see +350bps of expansion by 2018, as one-time costs decline and synergies ramp,” Sanchez added.
- Excess liquidity: Equinix has a lower dividend payout and capital intensity versus its peers, which offers greater flexibility to drive upside. The company may prioritize growth investments, and M&A could lend greater potential upside.
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