Tuesday, September 21, 2010

Morningstar Initiates Credit Coverage of Equinix with a BB Rating

By David Gross

Morningstar is now covering Equinix's (EQIX) credit, rating it BB. However, the debt rating agency made some odd comments in analysis, including:

"On the downside, there are numerous companies providing data center space, including giant network owners like AT&T T and Verizon VZ and other specialists like Savvis SVVS"

What? Since when have AT&T and Verizon even made a dent in Equinix's business? Or Savvis for that matter? They've been competing against one other for over a decade, and during that time Equinix has grown nearly 100-fold - from $13 million in revenue in 2000, to a run rate of $1.2 billion today.

What Morningstar doesn't get is that the key to continued success for Equinix is a focus on network neutral co-location, and at this point the provider is not veering into any dangerous overdiversifications, which are typically the biggest risk with any data center service provider.

Morningstar goes on to say:

"Pricing can come under pressure quickly if supply outstrips demand and data center owners seek to fill up unused space quickly."

In theory, I guess it could. In practice, it rarely has. In the middle of this recession, revenue per cabinet has risen 8% year-over-year. What Morningstar seems to be missing is that part of the reason revenue has been increasing is that underlying power costs are increasing, and those are unlikely to reverse course, regardless of what happens in the overall economy. Additionally, construction labor isn't getting cheaper. These two factors make EQIX very different than telcos which face declining costs.

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