Why Equinix Stock Was Swooning This Week

Key Points

• An important profitability metric for REITs won't look as shiny over the next few years, the company revealed.

• Both investors and analysts alike reacted negatively to that news.

• 10 stocks we like better than Equinix ›

The data center industry is standing in front of major expansion due to the unbending popularity of artificial intelligence (AI). Despite that, top sector name Equinix (NASDAQ: EQIX) has been having a rough few days on the stock exchange of late, especially following its analyst day event on Wednesday.

All told, according to data compiled by S&P Global Market Intelligence, week-to-date as of Thursday night, the company's share price was down by almost 16%.

Some growth to be gobbled by capex

No investor likes to hear that one of their investments might experience a slump in its growth rates. Yet that's exactly what happened with Equinix; on analyst day, it proffered guidance for its adjusted funds from operations (AFFO), the key profitability line item for real estate investment trusts (REITs) like itself. Management is forecasting 5% to 9% annual growth from 2025 through 2029.

The No. 1 reason for this is that the heavy demand for artificial intelligence (AI) capabilities requires significant expansion in data center capacity. So, a company like Equinix that specializes in such facilities is essentially forced to spend now to reap the benefits later.

Regardless, analysts didn't hesitate to become more bearish on the company. In fact, several institutions (such as Raymond James and BMO Capital Markets) downgraded their recommendations on the stock.

Still a long-term winner

Personally, I don't think that's fair. Intensifying capital expenditure requirements are entirely justified, given that so many developers and end users want robust AI functionality as soon as humanly possible, without bottlenecks. It's data center operators like Equinix that have to pay up front for this, at least at the current stage.

This stock's double-digit dip is, therefore, a good opportunity to buy a good company cheaply, in my view. Yes, profitability will be dinged for a while, but I think Equinix has great potential for patient investors who are willing to wait it out over the long term.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Equinix. The Motley Fool has a disclosure policy.

Why Equinix Stock Was Swooning This Week was originally published by The Motley Fool