Why Is Ken Griffin Buying Equinix?

Billionaire investor Ken Griffin’s Citadel fund has been on a buying spree in shares of data center operator Equinix (NASDAQ:EQIX) in recent months.

Q2’s 13F filing reveals that Griffin increased his stake in the company by over 700%, buying up nearly half a million shares.

Let’s take a look at why Ken Griffin is piling hundreds of millions into Equinix and whether the stock remains an attractive buy at today’s prices.

How Much Equinix Does Griffin Own?

After the most recent round of buying, Griffin’s fund owns about 564,000 shares of Equinix. The stake is currently valued at around $512 million.

The average cost basis for Griffin’s position is about $747 per share, whereas EQIX shares currently trade above $900 per share.

In other words, Griffin’s Equinix shares have already gained a total of over $90 million despite the fact that the vast majority of them were acquired only earlier this year.

What Does Griffin See in Equinix?

The most obvious case for Griffin’s position in Equinix is its potential as a pick-and-shovel play on the emerging AI industry.

As a massive data center operator, Equinix is in a unique position to take advantage of the growing demands of AI models for data storage and processing. It can also profit from the continued growth of ordinary cloud computing, which is likely to keep driving data center demand even if AI doesn’t prove to be the revolutionary technology the market expects.

Griffin has been generally bullish when it comes to AI, though his optimism has always been tempered with a sense of practical investing.

While building up his position in Equinix, he was also selling off nearly 80% of Citadel’s Nvidia holdings. This move was likely a reflection of the growing sense that Nvidia has become significantly overvalued.

While selling the giant AI chipmaker, however, Griffin was also buying Palantir, another major AI leader. Equinix, therefore, may be another way for Griffin to gain AI exposure at a somewhat more reasonable price.

Equinix is also no slouch when it comes to fundamentals. The company has reported positive year-over-year revenue growth in every single quarter since 2010, a track record that remarkably few companies would be able to match.

This constant stream of revenue growth has led to some fairly remarkable results. In 2014, just 10 years ago, Equinix generated full-year revenues of $2.44 billion. The current trailing 12-month total, by contrast, is now $8.60 billion.

Net income hasn’t been as much of a straight line up for Equinix, but the trends remain extremely positive. The increase in net income has been especially marked since the 2020-21 era, a reflection of both the rise of AI and continued growth in cloud computing demand.

In 2019, Equinix reported full-year net income of $508 million. For the 12 months ending in Q3, that number now stands at $1.06 billion.

Equinix’s profitability is also fairly respectable. Over the last year, the company has maintained a net margin of 12.3% and generated an 8.3% return on equity. The company is also continuing to grow its data center footprint with both acquisitions and the building of new infrastructure.

Notably, Equinix recently acquired three data centers in the Philippines to increase its business operations in the Southeast Asian market.

Equinix even enjoys a decently large moat by virtue of its scale and stable of high-value customers. Equinix is the largest US data center operator and currently does business on five continents.

The company’s data center services are used by the likes of Amazon, Apple and Meta, among many other extremely large companies. As such, the risk of Equinix facing a decline in demand or the sudden emergence of competitive pressures remains fairly modest.

A final point in Equinix’s favor that may have played into Griffin’s decision to buy is the fact that the stock pays an unusually high dividend for a high-growth tech company. Each share of EQIX pays $17.04 per year, translating to a yield of about 1.9%. At 564,000 shares, Citadel can expect to receive about $9.6 million in dividend income from its stake in Equinix.

Is Equinix a Buy Now?

For all of its strengths, Equinix does raise some concerns when it comes to valuation. The stock currently trades at 10.2x sales and 30.1x cash flow, both of which are worryingly high.

Even the stock’s price-to-earnings-growth ratio, often used to measure the value of fast-growing companies, is flashing signs of overvaluation at 2.0. Taking these factors together, Equinix doesn’t look particularly appealing from a value investing perspective.

Equinix’s extremely high valuation may leave limited room for additional returns in the short term. The median target price based on 29 standing ratings is $982 per share, a gain of just over 7% from the current market price.

While the stock maintains a strong buy rating from analysts overall, there’s a strong argument for the stock’s price simply being too high at the moment.

This view also seems to be supported by discounted cash flow analysis. Analysts expect Equinix’s earnings per share to rise at a compounded rate of about 11.3% over the next 3-5 years.

In the trailing 12-month period, the company has reported earnings of $11.09 per share. Even using an extremely low discount rate of 2.5%, Equinix would have to keep this growth rate up consistently for over seven years to be fairly valued at its current price.

Overall, Equinix appears to be an excellent business with very strong technological tailwinds behind it and a significant growth opportunity in front of it. With that said, the stock also gives strong signs of being overvalued in the current market.

As such, Equinix is likely more of a hold. Investors like Griffin who have already locked in a lower cost basis may continue to see returns, albeit likely at a slower pace. Those who don’t already own the stock may prefer to wait and watch for a pullback that would bring Equinix into a more reasonable price range.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.