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How Equinix is powering the cloud computing boom
As we switch from 4G to 5G and smart devices begin to communicate with each other, data usage and consumption is expected to increase some 300%-1000% compared with 4G. And with extra data comes the urgent need to build data centre infrastructure to house, capture and analyse it.
According to research house Gartner, Australian data centre infrastructure spending is expected to grow at a rate of 6.5 per cent in 2021 and global spending on data centre infrastructure is projected to reach US$200 billion ($263 billion) in 2021, an increase of 6 per cent from 2020.
In Australia alone the company forecasts organisations to spend roughly A$3 billion on data centre infrastructure in 2021, an increase of 6.5 per cent, following a 10.4 per cent decline in 2020. So that brings us to Equinix (NASDAQ: EQIX), an American data centre operator headquartered in Redwood City, California, specialising in internet connection and data centres. With a market capitalisation of US$65 billion, it’s no small fry. Rather, it’s a leader in global data centre market share, with 210 data centres in 25 countries on five continents.
How does a data centre work?
A few years ago, I conducted a site visit at Next DC’s (ASX: NXT) data centre located in Port Melbourne. Imagine a fortress-style warehouse that houses computing equipment in an industrial-scale operation using as much electricity as a small town. Impenetrable. Bomb-proof, nuclear-proof and flood-proof, the data centre can withstand almost anything. Inside the data centre resembles something like a library. Aisle after aisle, as far as you can see, of bookshelf-looking cabinets that store ‘racks’ containing various computer equipment owned by customers. With data centres, it is all about power (kilo watts, KW) and economies of scale. Data centres charge for power use by KW per rack, taking into consideration floor space and total power available. They charge more for the same space if the power density (KW per rack) is higher. This is where economies of scale come into play. The bigger the data centre, the lower the costs.
According to a research report released by the Ponemon Institute, a 500-5,000 square foot data centre compared to a 5,000-10,000 square foot data centre can cost as much as 64 per cent more to provide 1 KW of power to the smaller facility. Economies of scale can make a big difference, but the biggest data centre cost is operating and energy, which accounts for 80 per cent of the total.
Now we know you’re probably thinking “climate change, carbon foot-print?” The good thing about Equinix and most data centres, is that the company has designed, built and operated data centres with high energy-efficiency standards and a long-term goal of using 100% clean and renewable energy. Equinix so far has achieved 92 per cent renewable energy globally in 2019 with 5,250 GWh of renewables procured in 2019 out of 5,740 GWh electricity consumed. 93 per cent of Americas (100 per cent in the US alone), 75 per cent of Asia-Pacific and 99 per cent of EMEA was covered by renewables. Of course, not all data centres are powered from renewable energy. According to the energy council, “data centres account for almost 4 per cent of Australia’s total energy consumption and around 10 per cent of the world’s energy consumption.”
Basically, that ‘cloud’ where your Google account or Dropbox documents are stored isn’t in a cloud at all; it’s in one of Equinix’s data centres. And it’s not just cloud services that data centres are used for but everything that involves data. Every Google search, every Tweet and every Facebook post is powered by a data centre. With the number of internet users growing by 1 billion in just five years, data usage is showing no sign of stopping. The Energy Council says the last two years has produced over 90% of the world’s current data with most traffic coming from mobile smartphones. Most importantly, data centres allow businesses to connect with our businesses and to harness those huge amounts of data their users create: ultimately, that’s the most valuable role that they play.
As of today, Equinix is by far the largest data centre operator accounting for 11 per cent of the US$54 billion market, according to the latest global leader board by Structure Research. Following Equinix is Digital Realty (8%) and then comes China Telecom (6%).
Keep in mind that economies of scale drastically reduce costs. It is one of the key advantages enjoyed by Equinix. Going forward, though, for data centre operators to survive, their entire power consumption will need to be environmentally friendly and as energy-efficient as possible using renewably sourced power.
Equinix has been one of the beneficiaries of COVID-19 and while it isn’t the most exciting of stocks, it is a low-risk and stable portfolio stock that operates in a healthy space where demand for data storage is constantly growing. You could compare it to a low-growth, high-dividend-yield REIT. In saying that, though, the stock is not cheap, trading on a price/earnings (P/E) of 144 times earnings at a share price of $735. One broker has a one-year target of $844.
The company is due to release its earnings Feb 9, 2021, when all eyes will be on revenue growth and its ability to maintain pricing power.
