Equinix vs. Digital Realty Trust: Which REIT is a Better Buy?

Equinix, Inc. (EQIX) in Redwood City, Calif., is a digital infrastructure company that enables digital leaders to bring together and interconnect foundational infrastructure that powers their businesses. In comparison, Digital Realty Trust, Inc. (DLR), in San Francisco, supports the world's leading enterprises and service providers by delivering the full spectrum of data center, colocation, and interconnection solutions.

With concerns about high inflation and the Federal Reserve decision to raise interest rates, as well as fears over the impact the spread of the COVID-19 omicron variant may have on the economy, the stock market is expected to remain under pressure in the near term. Amid this environment, investors could turn toward REIT stocks to hedge their portfolios against short-term market volatility by ensuring a steady income stream. Consequently, we think both EQIX and DLR might rally.

DLR has gained 0.2% in price over the past six months, while EQIX has delivered negative returns. Also, DLR’s 2.7% gains over the past nine months are significantly higher than EQIX’s negative returns. Moreover, DLR is the clear winner with 9.7% gains versus EQIX’s 0.2% returns in terms of the past year’s performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On Jan. 17, 2022, EQIX announced a new International Business Exchange data center in Paris, France. Charles Meyers, EQIX’s President and CEO said, "In support of the Choose France initiative, today's investment and expansion serves to bolster the country's digital infrastructure capabilities, providing local and multi-national corporations with a foundational source of differentiation and the global platform needed to thrive in today's digital economy."

On Jan. 3, 2022, DLR announced that it had agreed to acquire a majority stake in Teraco, Africa's leading carrier-neutral colocation provider, from a consortium of investors, including Berkshire Partners and Permira. The strategic transaction establishes the company as the leading data center provider in Africa, accelerating its pan-African expansion.

Recent Financial Results

EQIX’s revenue increased 10% year-over-year to $1.68 billion for its fiscal third quarter, ended Sept. 30, 2021. The company’s adjusted EBITDA grew 6.7% year-over-year to $786.30 million, while its net income came in at $152.03 million, representing a 127.5% year-over-year increase. Also, its EPS was $1.68, up 127% year-over-year.

DLR’s revenue increased 11% year-over-year to $1.13 billion for its fiscal third quarter, ended Sept. 30, 2021. The company’s adjusted EBITDA grew 7% year-over-year to $610 million, while its net income came in at $136.54 million, versus a $1.45 million loss in the prior-year quarter. Also, its EPS was $0.44 compared to a $0.14 loss in the year-ago period.

Past and Expected Financial Performance

EQIX’s revenue and EPS have grown at CAGRs of 9.2% and 5.8%, respectively, over the past three years. Analysts expect EQIX’s revenue to increase 8.7% for the quarter ending March 31, 2022, and 8.1% in its fiscal year 2022. The company’s EPS is expected to grow 4% for the quarter ending March 31, 2022, and 39.5% in fiscal 2022. Moreover, its EPS is expected to grow at 37% per annum over the next five years.

In comparison, DLR’s revenue and EPS have grown at CAGRs of 13.4% and 21.6%, respectively, over the past three years. The company’s revenue is expected to increase 3.8% for the quarter ending March 31, 2022, and 6.5% in its fiscal year 2022. However, its EPS is expected to decline 72% for the quarter ending March 31, 2022, and 37.3% in fiscal 2022. DLR’s EPS is expected to grow at 23.2% per annum over the next five years.

Profitability

EQIX’s trailing-12-month revenue is 1.48 times what DLR generates. EQIX is also more profitable, with a 35.90% levered FCF margin, versus DLR’s 22.30%.

Furthermore, EQIX’s 4.05%, 2.68%, and 2.90% respective ROE, ROA, and ROTC are higher than DLR’s 3.95%, 1.43%, and 1.54%.

Valuation

In terms of forward non-GAAP PEG, DLR is currently trading at 15.81x, which is 67.7% higher than EQIX’s 9.43x. And DLR’s forward 13.47x EV/S ratio is 15.8% higher than EQIX’s 11.87x.

So, EQIX is the more affordable stock.

POWR Ratings

EQIX has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In comparison, DLR has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

EQIX has a B grade for Growth, which is consistent with analysts’ expectations that its EPS will increase in the near term. DLR has a C grade for Growth, which is in sync with analysts’ expectations that its EPS will decline in the coming months.

EQIX has a C grade for Quality. This is justified given EQIX's 2.90% trailing-12-month ROTC, which is 53.3% higher than the 1.90% industry average. On the other hand, DLR has a D Quality grade, which is consistent with its 1.54% trailing-12-month ROTC, which is 18.9% lower than the 1.90% industry average.

Of the four stocks in the REITs - Data Centers industry, EQIX is ranked first while DLR is ranked third.

Beyond what I have stated above, we have also rated the stocks for Sentiment, Stability, Momentum, and Value. Click here to view all the EQIX ratings. Also, get all the DLR ratings here.

The Winner

Because the stock market is expected to remain under pressure on concerns over the resurgence of COVID-19 and high inflation, REITs should witness increasing investor attention due to their high dividend yield. While both EQIX and DLR are expected to gain, we think it is better to bet on EQIX now because of its higher profitability, lower valuation, and better growth estimates.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the REITs - Data Centers industry here.

EQIX shares were trading at $714.72 per share on Monday morning, down $6.86 (-0.95%). Year-to-date, EQIX has declined -15.50%, versus a -9.54% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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