Equinix Stock Is A Good Way To Play Cloud Growth

• Public cloud vendors are increasingly establishing private links to the Equinix data centers.
• This trend is being fueled by the demand for high-performance and secure network connections.
• Providing interconnection services to cloud vendors is firing growth for Equinix.

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Equinix (NASDAQ: EQIX) is a leading provider of data center and co-location services. Despite being the world’s largest provider of data center colocation services, this Real Estate Investment Trust (REIT) stock has tended to fly under the radar of many investors. When many investors think of playing the cloud, leading cloud vendors such as Amazon (NASDAQ:AMZN), Microsoft (NASDAQ: MSFT), Google (NASDAQ GOOGL), and IBM (NYSE: IBM) are what come to the top of the mind. Yet, Equinix stock has handily outperformed these cloud titans over the past 12 months, with the exception of Amazon. EQIX shares have tucked on gains of 34.5% over the past one year compared to 61.3% for Amazon, -4.9% for Microsoft, 14.3% for Google, and -23.1% or IBM (Sept 15 closing prices).

Source: Amazon Stock Price vs Equinix stock price data by amigobulls.com

Equinix shares have gained 7.4% over the past five days after the company made a $280 million bid for Japan’s Bit-isle, one of its top competitors in the Japanese data center market, a move that will create the fourth largest data center operator in the country. Although Equinix is the world’s largest data center services provider with about 12% market share, it’s not nearly as dominant in the fast-growing Asia-Pacific market. Equinix is currently ranked the 15^th largest data center services provider in Japan while Bit-isle is the seventh-largest. The latest acquisition comes closely on the heels of the company’s Singapore and Hong Kong datacenter expansion, and will give Equinix a strong foothold in one of the world’s largest trading hubs. Gartner has predicted that growth in the cloud services market in Asia-Pacific in 2015 will clock in at 14%, the world’s fastest growth.

Equinix had earlier in the year gobbled up Telecity, Europe’s largest data center services provider, in a $3.6 billion deal that was seen as a defensive move to prevent Telecity from merging with Interxion and leapfrogging Equinix in market share in the EMEA region. The merged entity gives Equinix a 9% market share in EMEA compared to second-placed Interxion’s 3.5% slice.

Equinix therefore appears to be making highly strategic moves to either build market share where it’s not as dominant, or consolidate its lead where it’s already strong. But other than inorganic growth, there are more reasons why Equinix remains a good way to play cloud growth.

Private Interconnect Links and Hybrid Clouds

Other than providing traditional data center colocation services (75% of revenue), there is another good reason why Equinix has managed to rack up a stellar record of 50 consecutive quarters of revenue growth--providing private interconnect links for the world’s largest cloud vendors. Interconnection Services (25% of revenue) is the company’s fastest-growing segment, growing at about 17% compared to 10% overall growth for the company. Interconnection services are dedicated private links that companies use to deploy specific workloads in the cloud. Nearly all the top cloud vendors have established private links with Equinix data centers to provide their customers with a faster and more consistent network performance. The private link completely bypasses public Internet connections thus helping clients build highly secure hybrid clouds.

Microsoft announced early this year that Office 365 customers in several regions would be able to access the service via a private connection to Equinix. VMware (NYSE:VMW) followed a little later with an announcement that its vCloud Air customers would be able to access a private link to Equinix to help them meet EU compliance and data protection regulations.

With more customer options for hybrid clouds instead of either private or public clouds, cloud vendors are trying to address security issues by providing private links that bypass the Internet. As a result, Equnix now has a new revenue stream that is powering the company's revenue growth.

Source: RightScale

Analysts remain optimistic about Equinix, and have raised their average Equinix earnings estimate for the current fiscal year by about 29%. Meanwhile, Equinix expects earnings to grow by more than 100% during the current year. Despite the good gains made by the shares this year, Equinix stock still has a good upside potential over the medium-term and long-term.