Equinix Exposed: Major Accounting Manipulation, Core Business Decay And Selling An AI Pipe Dream As Insiders Cashed Out Hundreds of Millions

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  • Equinix is an $80 billion market cap data center REIT with over 260 facilities globally. It has 10,000+ customers, ranging from small businesses to large cloud “hyperscaler” providers like Amazon, Microsoft and Google.
  • Even if you ignore the findings of our investigation and take the financials of Equinix at face value, the company trades at elevated levels; an ~86% premium to its peers on a price to forward adjusted funds from operations (“AFFO”) basis and a ~59% premium on a price to forward funds from operations (“FFO”) basis.
  • Our investigation, which included a review of financial and litigation records and interviews with 37 former Equinix employees, industry experts and competitors, revealed that Equinix manipulates its accounting for AFFO, the key profitability metric for REITs. We estimate this metric was overstated by at least 22% in 2023 alone.
  • A key accounting trick to boost AFFO is to misclassify ‘maintenance CapEx’ as ‘growth CapEx’, giving the appearance that the company’s cost to maintain its revenue base is lower than it actually is, making the company appear more profitable.
  • When Equinix transitioned to become a REIT in 2015, it began using AFFO as a key metric in determining executive bonuses. That same year, Equinix reported a sudden 47% drop in maintenance CapEx, leading to an estimated 19% boost to reported AFFO.
  • The company also reported a sudden spike in growth CapEx on its balance sheet, a dynamic that has continued for almost 10 years. This shift has fueled Equinix’s stellar non-GAAP reported AFFO metrics and enriched its top executives.
  • During our investigation, former employees and executives provided an array of examples of obvious maintenance CapEx being classified as growth CapEx in order to boost reported AFFO metrics.
  • This manipulative practice stems from top management, according to former employees. In December 2023, Equinix’s Chief Accounting Officer Simon Miller alluded to “pressure” the company put “on design and constructions teams to release capacity” and “push that into expansion [growth] capex”.
  • In one example, a former director explained how Equinix would seek new serial numbers for refurbished equipment in order to recognize the old repaired item as new and book it as growth CapEx. “That’s really on the edge”, they explained.
  • Batteries represent one of the largest data center replacement costs. A former operations director explained how Equinix would classify routine battery replacements as growth CapEx by characterizing it as “replacing a battery system”.
  • Equinix’s accounting even went as far as classifying light bulb replacements as growth CapEx, per former employees. “Say you changed out fluorescents to LED light bulbs, that’s a capital improvement. You’re not replacing lightbulbs, you’re enhancing”.
  • These accounting manipulations have manifested in what look like obviously distorted company metrics. For example, management has guided that maintenance CapEx in Q1 2024 may be less than it was 14 years ago in Q1 2010, despite Equinix now having 5x the number of data centers and 8.6x the revenue.
  • Another widely watched metric that should have some relation to growth CapEx is the growth of cabinets, the physical enclosed areas that data centers offer to clients. Despite growth CapEx at all-time highs, billed cabinet growth slowed to 1.7% in 2023.
  • We estimate that Equinix’s manipulation of maintenance CapEx has resulted in a cumulative $3 billion boost to reported AFFO since 2015.
  • Equinix’s questionable AFFO accounting has contributed to an estimated $295.8 million in stock award grants to top executives who have personally benefited from these accounting games.
  • In 2023, Equinix reported a 17.6% operating margin, almost double the 9.5% margin reported by its closest peer, Digital Reality. The margins imply that Equinix has a vastly more profitable offering.
  • Our findings indicate that Equinix’s operating margins are driven by more financial engineering. Equinix manipulates its accounting for operating expenses (“OpEx”), a key GAAP metric, resulting in inflated profitability and AFFO, based on our analysis and interviews with former employees.
  • “They want to capitalize as much as possible and expense as little as possible so that the numbers are looking nice”, a former finance director told us.
  • Former employees described pressure from different teams within Equinix to push operating expenses into CapEx. A data center manager told us the accounting team viewed OpEx as “dirty spend”.
  • One technique used by Equinix is to change the wording of projects to make them sound like capital improvements, according to a former director: “what happens is basically wording in such a way that it sounds like it’s a capital improvement. You can get very creative with language.”
  • Former employees described how Equinix would lump smaller expenses together in order to inappropriately book them as CapEx. A former director told us that if you buy one item like a tool set, it wouldn’t qualify as CapEx, but “if you go over [a] certain threshold and you buy a set of them…maybe five of them…that’ll count towards your CapEx”.
  • A former Equinix employee explained how vendors would be pressed to create unique SKUs to lump basic operating costs into larger purchases, then Equinix would record the bulk purchase as CapEx. “…it’s very easy to talk to your vendors and say, ‘hey, can you create a new SKU?’ Who’s going to turn down business for that?”
  • By comparison, Digital Realty, a key competitor, specifically stopped using an expense/capitalization threshold 13 years ago to “be more in line with GAAP accounting practices”, per its CFO.
  • We believe these OpEx games have resulted in an overstatement of 2023 AFFO beyond the estimated 22% boost from maintenance CapEx to growth CapEx manipulation.
  • Beyond accounting, Equinix has relied on a risky approach to growing revenue: overselling power capacity in the hope that customers won’t use all the power they’ve contracted for. A former executive told us it is “the dirty secret”, stretching Equinix’s infrastructure to the limit.
  • Equinix reports 79% “utilization” across its data centers, implying that it has significant growth runway with its existing infrastructure. However, this metric is based on utilization of cabinet space, not power, the critical constraint at many of Equinix’s facilities.
  • Equinix does not disclose its power utilization across data centers to investors. On its Q4 2023 conference call, Equinix’s CFO specifically said power “doesn’t feel like the right metric to be sharing given the nature of our business model…”
  • “The whole thing is like a little bit of a shell game,” a former executive told us, with another saying that data centers could be oversold by up to 175% of power.
  • A former executive confirmed the risks of overselling power include facility outages and a failure to fulfil contractual obligations, representing “a very significant reputational challenge”.
  • Investors have rewarded Equinix as though it is a key AI (artificial intelligence) beneficiary. However, the growth of AI is projected to double the power demands of data centers within 2 years, according to industry research, posing a threat to Equinix’s power-constrained facilities.
  • Former employees expressed doubt that Equinix could meaningfully upgrade its older facilities to meet these new power requirements. A former executive told us: “That’s a big problem because every single site in the estate is oversold by 25% and there’s no easy way of fixing that.”
  • Equinix’s two main revenue sources are 1) colocation– the leasing of rack space and 2) interconnection – fast direct connection between customers or providers, comprising 70.4% and 17% of total revenue, respectively.
  • These two core businesses, comprising ~87.4% of total revenue, are being disrupted by large cloud providers like Amazon, Google & Microsoft, collectively called “hyperscalers”.
  • Equinix is losing colocation business to hyperscalers, who are “essentially controlling the relationship with the customer”, per a former Equinix executive. The changing industry dynamic has slashed margins, with further commoditization expected to continue.
  • Underscoring this risk, 4 of the world’s largest financial exchanges, which are existing Equinix customers, have announced plans to move to the cloud: Nasdaq, CME Group, Deutsche Boerse and the London Stock Exchange.
  • Equinix’s attempt to target hyperscalers with an offering called “xScale” has been ineffective due to its cost disadvantages. It generates only ~1% of Equinix’s revenue, with former employees describing it as an option of last resort for customers due to cost.
  • On interconnection (17% of revenue), as more customers move to the cloud, providers have developed options that bypass Equinix’s interconnection.
  • New cloud “aggregators” are also emerging, called “cloud-native WANs” offering cost effective and easy to deploy interconnection solutions. An S&P Global market intelligence report notes the threat these providers pose to data centers’ interconnection business.
  • Like in colocation, hyperscalers are also driving down the price of interconnection, with some customers even paying nothing. “Board level…this is a serious concern because hyperscale is paying nothing for cross-connects”, a former executive told us.
  • In short, Equinix now faces unprecedented competition and commoditization risk in its core product offering. Unable to address these challenges with product innovation, management has instead resorted to financial engineering.
  • None of these issues seem lost on management and insiders, who have been awarded compensation based on manipulated AFFO metrics and have cashed out $476 million since the company’s conversion to REIT status, including over $100 million since 2023.
  • Last week, on March 12, Equinix announced that current president and CEO Charles Meyers – who “shaped the company’s successful strategy” — would be transitioning to the role of Executive Chairman.
  • In the same release, the company also announced that Chairman, Peter Van Camp, would “step away from formal responsibilities as a Board member” to act as Special Advisor to the Board.
  • Overall, as management tiptoes into the background after cashing out, we believe Equinix’s hefty valuation premium, claimed market leadership, and growth prospects will soon reverse course.

Initial Disclosure: After extensive research, we have taken a short position in shares of Equinix, Inc. (NASDAQ:EQIX). This report represents our opinion, and we encourage every reader to do their own due diligence. Please see our full disclaimer at the bottom of the report.

Background: $80 Billion Global Data Center REIT With 260 Facilities Globally

Equinix is a global data center REIT with a market capitalization of $80 billion. The company went public in August 2000 and has grown to operate 260 facilities globally.

70.4% of Equinix’s revenue comes from “colocation”, the leasing of rack space to external parties to house servers and/or network hardware. [F-58]

The remainder of its revenue is mainly derived from “interconnection” (17%), essentially a fast, cheap and secure direct connection between customers seeking to exchange data in the same data center, among other facilities in the Equinix network, or externally. [F-58]

Equinix has 10,000+ customers, ranging from small businesses to large cloud “hyperscaler” providers, like Amazon, Microsoft and Google.

Equinix currently pays a 1.98% dividend and trades just ~7.6% off its all-time highs. It has delivered a 6,933% return since listing in 2000.

Bull Case: A Diverse Global Client Base And Boom In AI Data Demand Will Result In Rapid Growth

Given Equinix’s scale and breadth of its customer base, it has the largest interconnection share globally among its competition. [Pg. 46] Bulls see this as a unique proposition for enterprise clients with operations in multiple geographies, resulting in Equinix commanding premium prices.

Adding to this, the company is perceived to be a beneficiary of increased demand for data, as well as rapid uptake in AI.

Demand for data is increasing rapidly and global interconnection bandwidth is set to grow at a 34% compound annual rate from 2022 to 2026, according to Equinix’s own research study. [Pg. 23]

(Source: Equinix 10-K)

In Equinix’s Q4 2023 presentation, the company projected it would grow revenue by 7-9% with 46.7% adjusted EBITDA margins in 2024. It also predicted an 8-10% rise in AFFO (adjusted funds from operations) per share, a closely watched non-GAAP metric used to assess REITS.[1] [Slides 12-14]

Fundamentals: Equinix Trades At An 86% Premium To Data Center Peers On A Price to Adjusted Funds From Operation (“AFFO”) Basis

REIT investors tend to rely on metrics such as Price to Funds From Operations (“P/FFO”) and Price to Adjusted Funds From Operation (“P/AFFO”), which adjusts for depreciation, among other things, and in the case of AFFO, adjusts for capital expenditures (i.e. CapEx) related to long-term growth initiatives.

AFFO is meant to give REIT investors a better way to assess true cash flow and the ability to pay dividends in the future.

On a fundamental basis, Equinix is already valued at a 59% premium to peers on P/FFO (1 year forward consensus estimates) and at an 86% premium on a trailing P/AFFO basis, essentially pricing in rapid future growth expectations and growth well past peers.

(Source: Bloomberg)

But rather than exhibiting signs of runaway growth, Equinix exhibits signs of a slowdown. Over the last 5 years, Equinix has generated average annual revenue growth of 10.05%.[2] Going forward, market consensus estimates revenue to grow at a slower 8.1% YoY in 2024, per Bloomberg.

Equinix has also generated significant negative free cash flow (FCF) from 2017 to 2023, totaling $6.7 billion, per its disclosures. [1, 2, 3, 4, 5, 6, 7] Investors have largely been untroubled by this, attributing the negative FCF to Equinix’s substantial reported growth-related capital expenditures, which have totaled $14.3 billion during the same period. [3]

To fund its cash shortfall, Equinix has raised net proceeds of $8.5 billion from public stock offerings since 2017, per SEC filings. [1, 2, 3]

Insiders Have Cashed Out Over ~$327 Million Since 2019, Including ~$112 Million By Equinix’s CEO

In The Same Period, The Only Executive Or Director Who Made An Open Market Purchase Was A Director That Made A Lone $3.1 Million Purchase

While repeatedly raising funds since 2019, insiders have personally cashed out ~$327 million of Equinix shares, per FactSet. During that period, CEO Charles Meyers personally cashed out ~$112 million.

(Source: FactSet)

The only director who bought any shares over that period is William Luby, with a sole purchase totaling $3.1 million amid the COVID dip in April 2020, according to FactSet data. [4]

Part 1:  Equinix Manipulates Its Accounting For AFFO, Its “Key Profitability Metric”

We Estimate That AFFO Has Been Overstated By At Least 22% In 2023 Alone

In 2015, Equinix converted to a REIT, a tax-advantaged structure that must distribute most of its income to investors. Immediately following this change, the company reported a spike in reported growth CapEx (called ‘non-recurring CapEx’) on the company’s balance sheet and a withering of reported spending on maintenance CapEx (called ‘recurring CapEx’). That shift has sustained Equinix’s stellar non-GAAP AFFO metric and enriched its top executives.

For 10 years, investors have been either unaware of or have given Equinix the benefit of the doubt regarding this shift, convinced that the company has transformed much of its routine maintenance spending into an activity that simultaneously generates more capacity to expand its business.

Our research, however, found that this sustained rise in reported AFFO, driven by shrinking reported maintenance CapEx, is more financial engineering than actual engineering.

Our investigation involved interviewing 37 former Equinix employees, industry experts and competitors, along with reviewing financial statements and litigation records.

Our investigation found that Equinix (i) bases its executive bonus compensation on the company’s AFFO metric (ii) then manipulates its accounting for maintenance CapEx to overstate this AFFO figure, resulting in the illusion of vastly higher AFFO, higher executive bonus compensation and an inflated stock price.

A Primer On How To Manipulate Reported AFFO By Minimizing Reported Maintenance CapEx

In February 2024 the CEO of Equinix described AFFO per share as “the key profitability metric for a REIT.”

Note that reported total CapEx comprises (1) recurring CapEx (“maintenance CapEx”), which consists of costs meant to maintain facilities, and (2) non-recurring CapEx (“growth CapEx”), which consists of investments in new facilities or initiatives intended to generate new revenue.

Adjusted funds from operations, or AFFO, is a company’s funds from operations, less maintenance CapEx and other spending necessary to maintain its existing revenue base.[5]

Since one of Equinix’s main costs is maintaining and repairing its data centers, maintenance CapEx (i.e. “recurring” CapEx) is a critical factor in determining the company’s AFFO.[6] In short, the lower maintenance CapEx Equinix reports, the higher its AFFO will be.

(Source: 2023 Equinix Annual Report Showing AFFO Computation [Pg. 66])

REIT investors rely on companies to accurately account for the split between maintenance CapEx and growth CapEx to assess the profitability of a company’s current operations and its financial commitment to future growth initiatives. If a REIT were to inappropriately shift maintenance CapEx into growth CapEx, it would inflate reported current profitability while giving investors the false impression that it is investing heavily into anticipated growth.

In 2015, The Company Transitioned to REIT Status And Began Using AFFO As A Metric In Determining Executive Bonuses

That Same Year, Equinix Reported A 47% Drop In Maintenance CapEx, Leading To An Estimated 19% Boost To AFFO

In 2013 and 2014, the two financial years before it became a REIT, Equinix reported ongoing (maintenance) CapEx of $183 million and $227 million. [1, 2] This represented 8.5% and 9.3% of total revenue, respectively. [7]

In 2015, Equinix’s executive incentive plan and long-term performance compensation plan replaced adjusted EBITDA as a key metric with AFFO, per its proxy statement.[8] [Pg. 24]

(Source: Equinix 2015 Proxy Statement [Pg. 24])

In the same financial year, 2015, after the conversion to REIT status and these key changes to Equinix’s executive compensation formula, reported maintenance CapEx plummeted by 47% to $120.3 million, or 4.4% of total revenue, according to the company’s annual report. [Pgs. 9 & 60, F-64]

(Source: Equinix Earnings Releases & Annual Reports)

Based on the previous level of maintenance CapEx spend in 2014, we estimate AFFO was artificially boosted by 19% in 2015. [9]

We Estimate That Equinix’s Manipulation Of Maintenance CapEx Has Resulted In a Cumulative $3 Billion Boost to AFFO Since Its 2015 Conversion To REIT Status

An engineer who worked at Equinix’s large Secaucus data center in the US, which was built in 2006, told us: “you would be amazed at the amount of equipment that goes offline, needs to be repaired”.

Generally, as physical assets like data centers get older, maintenance costs increase.

Contrary to this basic physical reality, Equinix’s maintenance CapEx significantly declined as a percentage of revenue over the past decade, from 9.3% in 2014 to 2.7% in 2023, despite its facilities aging. [10]

Underscoring the importance of this metric, during the company’s Q4 2023 investor call, an analyst at Deutsche Bank queried management about a $10 million uptick in reported maintenance (i.e. “recurring”) CapEx:

“Just a couple of housekeeping ones for me. First, if you can comment on what drove the slight increase? I think it was about $10 million increase of recurring CapEx” (Matt Niknam, Deutsche Bank, Q2 2023 Earnings Call)

We think investors are missing the big picture by focusing on small variations in reported maintenance (recurring) CapEx. We estimate the company has inflated AFFO by a cumulative $3 billion via accounting manipulations, based on normalized levels prior to its switch to REIT status.[11]

This sustained accounting manipulation stems directly from top management, according to our findings.

In December 2023, Equinix’s Chief Accounting Officer Alluded To “Pressure” The Company Put “On Design And Constructions Teams To Release Capacity” And “Push That Into Expansion [Growth] Capex”.

In December 2023, Equinix’s Chief Accounting Officer, Simon Miller, alluded to the top-down pressure being exerted on design and construction teams to push expenditures into expansion (i.e., growth) CapEx:

(Source: Barclays Global Technology Conference 2023, Pg. 11)

This “pressure” to push items into growth CapEx appears to permeate the organization, from management to operational teams. A former executive we interviewed explained that accounting teams headed by the Chief Accounting Officer were pressured by management to classify as much CapEx as expansion (growth CapEx) as possible:

“But he’s definitely like all accounting people get pressure from management to push as much of CapEx into expansion.”

The tone from the top also became evident when speaking with numerous former employees. Even as they detailed accounting games that outsiders would likely view as flagrant manipulation, many described these examples as though they were nothing more than a creative and dutiful execution of their responsibilities placed on them by management to boost reported AFFO by almost any means necessary.

During Our Investigation, Former Employees And Executives Provided Examples Of Obvious Maintenance CapEx Being Classified As Growth CapEx In Order To Boost Reported AFFO Metrics

Given the potential for management to manipulate non-GAAP measures such as AFFO, the SEC provides specific guidance regarding its presentation. It prohibits the use of any non-GAAP metric which smooths or eliminates non-recurring, infrequent or unusual items from the calculation, if the following is true of those items:

  1. The nature of the charge or gain is reasonably likely to recur within 2 years or;
  2. There was a similar charge or gain within the prior 2 years.

But former Equinix employees informed us of a slew of different recurring costs that were classified as one-time, driven by management’s obsession with boosting AFFO.

Example: A Former Director Explained How Equinix Would Seek New Serial Numbers For Refurbished Equipment In Order To Recognize The Old Repaired Item As Growth CapEx

“That’s Really On The Edge”, The Former Director Explained

A former Equinix director we interviewed detailed specific situations in which maintenance CapEx was shifted to growth CapEx.

For instance, when fixing a chiller, a key piece of data center equipment that helps regulate temperature, they described how the company would obtain new serial numbers for refurbished chillers so it could then be accounted for as a ‘new’ item post-repair, and sometimes recognized as growth CapEx:

Chillers are tough… Chillers stay in place. You don’t replace chillers. All you do is rebuild them. There’s been some debate on this. What happens and what you work towards is you do a chiller overhaul. And you’d work with your chiller vendor to give you a new serial number on the unit.”

A new serial number with the unit, for all intents and purposes, looks, talks, walks like a brand new installation.”

They acknowledged that the practice was “really on the edge” of growth CapEx classification:

“That’s kind of on the edge. That’s really on the edge… Some years it does [get allowed] and some years it doesn’t, depending on how the interpretation is seen.”

They added that sometimes accounting teams stopped bothering to look at the description of the submitted expenditures in order to lump it all in the same CapEx category:

“And then after a while, people stopped reading. The senior level people in the accounting department—they stop reading the verbiage and they look at the top line.”

One of Equinix’s Largest Data Center Replacement Costs Is Batteries, According To Former Employees

A Former Operations Director Explained How Equinix Would Classify Battery Replacements As Growth CapEx By Characterizing It As Replacing A Battery “System”

In data centers, batteries are essential to the uninterruptible power supply (UPS), an automated back-up system that can be switched to instantly in case of power issues. UPS batteries are a major replacement cost in any data center, former employees explained to us.

A former operations director, who managed multiple centers, told us:

“You’re always doing batteries. Someplace, somehow, some way, you’re always doing batteries.”

Multiple former executives confirmed this was one of the biggest costs, with one saying:

“One of the biggest ones [maintenance costs], obviously, is the batteries. You’ve got millions of dollars of batteries sitting there.”

Another added:

“This is the largest expense in a data center. Battery replacement. That sucks. That is just money leaving your pocket… It sat there, hopefully did nothing for its lifetime, just sat there getting charged. You never had to use them and then you just replace them.”

The former operations director told us that Equinix would classify otherwise routine battery replacements as growth CapEx by characterizing this activity as replacing a “battery system”.

“So replacing a battery system is a capital improvement. Non-recurring… As long as it’s part of that, as long as you replace the entire battery system… All you do is replace the batteries within the cabinets. And that’s considered the system.”       

As a result, one of Equinix’s largest data center costs, an obviously recurring cost across its data centers, appears to be showing up in growth CapEx.

Equinix’s Accounting Even Went As Far As Classifying Light Bulb Replacements As Growth CapEx, Per Former Employees

“Say You Changed Out Fluorescents To LED Light Bulbs, That’s A Capital Improvement. You’re Not Replacing Lightbulbs, You’re Enhancing” – Former Operations Director

Most companies wouldn’t view an activity as mundane as changing light bulbs to be a catalyst for growth. The creative accounting minds at Equinix apparently see things differently.

A former senior Equinix operations manager described changing lightbulbs as a routine, daily operation:

“You would be surprised how quick these light bulbs blow on this. Thousands of them. Right. So part of the daily inspections is to look at areas where the light bulbs are blown.”

Even here, the company found ‘creative’ ways to book things like basic lightbulb replacements as growth CapEx. A former operations director explained:

“Say you changed out fluorescents to LED light bulbs, that’s a capital improvement. You’re not replacing lightbulbs, you’re enhancing.

By qualifying light bulb changes as “enhancements” that improve overall facility efficiency, the routine spend becomes growth CapEx. They explained:

“Say you have a facility. You needed to change light bulbs…Or you had to change all the ballasts in your light fixtures because they were just at age. Which is costly. You need an electrician to come in to take it down. You need to unwire it and rewire it. Now, if you were to go back in and now convert those florescent bulbs or systems with the ballast and the bulbs to an LED light, now you’re performing an ‘energy efficiency project’.”

Hindenburg Researcher: “And that can be a non-recurring capital expenditure?”

Former Employee: “Correct. Absolutely.”

A former Equinix finance director at first expressed surprise that we knew about the practice before acknowledging:

“This is one of the tricks that the operations teams use to say, well, this is not ongoing. This is non-recurring CapEx.”

Another former Equinix finance director familiar with internal accounting procedures told us how Equinix could seek to justify it:

”So the reason we’re going to change the light bulbs is because we want to increase our profitability then I could see them justifying that one and saying, ‘Well, that’s discretionary. We’re doing it because of this reason’… I see there’s lots of stuff around wanting to reduce their power consumption.”

Equinix Management Guided That Maintenance CapEx In Q1 2024 May Be Less Than It Was 14 Years Ago In Q1 2010, Despite Having 5x The Number Of Data Centers And 8.6x The Revenue

These accounting manipulations result in reported metrics that defy logic.

As a data center business increases its revenue, expands and acquires new facilities, it would be plainly obvious that maintenance CapEx in absolute terms should increase.

In Q1 2010, Equinix operated 51 data centers and reported quarterly revenue of $249 million, per its press release. Its recurring CapEx was $14.5 million.

In Q1 2024, 14 years later, Equinix operates 260 data centers and is expected to report $2.14 billion in quarterly revenue, per Bloomberg estimates. [Pg. 16] Despite operating 5x the number of data centers generating 8.6x the revenue, management guides a lower maintenance CapEx range of $14 million in the quarter, less than its maintenance CapEx 14 years ago.

(Source: Equinix Q4 2023 Investor Presentation [Slide 11])

Growth CapEx Is At All Time Highs, Yet Billed Cabinet Growth, A Key Measure Of Actual Physical Infrastructure Growth, Slowed to 1.7% in 2023

Another widely watched metric that should have some relation to growth CapEx is the growth of cabinets, the physical enclosed areas that data centers offer to clients. In its Q3 2023 investor call, the CEO mentioned the importance of the metric, saying it would “have to be a part of the growth story over time”.

Given this, one might expect that with Equinix’s massive claimed growth CapEx, billed physical cabinet metrics would be growing quickly along with it.

However, while reported growth CapEx stood at all-time highs in 2023, year-on-year billed cabinet growth fell from 14.8% in 2018 to 1.7% in 2023.

(Source: Equinix Earnings Presentations 2018-2023 [1, 2, 3, 4, 5, 6])

Equinix’s Questionable AFFO Accounting Has Substantially Contributed To $295.8 Million In Stock Award Grants To Top Executives

“There’s Every Incentive To Categorize As Much As You Can As Expansion [Growth] CapEx” – Former Executive

As noted earlier, in 2015, Equinix changed its executive compensation plan to specifically reward AFFO growth, with 50% of annual incentive pay weighted toward AFFO and 50% to revenue, per its proxy statement.

(Source: Equinix 2016 Proxy Statement, Outlining The Previous Year)

AFFO has been a key metric in executive performance awards in every year since then. [12]

In 2022, AFFO per share still remained one of the key metrics considered in Annual Incentive and Long Term Performance Incentives.

(Source: 2023 Proxy Statement [Pg. 36])

As a result, since 2015, senior executives have been awarded ~$295.8 million in cumulative stock awards, with stock awards rising almost every year.

(Source: Equinix Proxy Statements [1, 2, 3, 4, 5, 6, 7])[13]

A former executive told us this compensation policy incentivized executives to push the boundaries on CapEx classification:

“You’re being valued off and you know your executive comp[ensation] is tied to AFFO per share. There’s every incentive to categorize as much as you can as expansion [growth] CapExthey’re making that case for every questionable piece of CapEx”

In short, by reducing reported maintenance CapEx and inflating accounting metrics like AFFO, Equinix executives have ensured they personally benefit from their accounting manipulations.

Part 2: Equinix Manipulates Its Accounting For Operating Expenses, A Key GAAP Metric, Resulting In Inflated Profitability and AFFO

They Want To Capitalize As Much As Possible And Expense As Little As Possible So That The Numbers Are Looking Nice” – Former Equinix Finance Director

In 2023, Equinix reported a 17.6% operating margin, almost double the 9.5% margin reported by its closest peer, Digital Reality. The margins imply that Equinix is vastly more profitable, therefore justifying a higher stock multiple.

Former employees told us that those abnormally high operating margins were engineered with more accounting trickery. In addition to misclassifying CapEx between maintenance and growth, management pressured employees to push operating expenses (“OpEx”) into CapEx, sometimes regardless of the nature of the spend.

Reclassifying operating expenses as CapEx to boost profitability metrics is a notorious accounting trick and was at the center of the WorldCom scandal in the early 2000s, in perhaps the best-known example.

A former director of operations described a culture where operating costs were routinely capitalized, making margins appear artificially higher:

“So anything, any operation that’s completed of significance, you look for all different types of creative accounting ways to show it as CapEx.

We asked the former director how far they could go taking OpEx to CapEx. They replied:

It’s endless. I mean, it’s really about thinking out of the box about how you approach things. And if you can, if your accounting department will agree with you.”

A Former Data Center Manager Described How The Accounting Team Viewed OpEx As “Dirty Spend” And Would Pressure Teams To Book Expenses As CapEx

Former M&A Manager: “They Asked Me To Do Every Machination To Try To Make A CapEx Versus OpEx”

Other former employees also described pressure to push operating expenses into CapEx from different teams within Equinix. One former data center manager said they felt squeezed by “operationally focused accountants”:

“They would assess all our expenses versus our recurring CapEx… [They were] always trying to squeeze your expenses, your OpEx, because it was ‘dirty spend’.”

A finance director told us teams were overseen by “accounting watchdogs”, the accounting team who tried to curtail operating expenses:

“You know, you have these accounting watchdogs there to basically try to keep the floodgates tight.”

They added that operating teams felt pressured to work in “gray” areas:

“They [operating teams] have a lot of pressure on the operating budget. So, the operating cost and then they try to squeeze stuff that is kind of gray into the CapEx area and move it out of the OpEx area.”

A former M&A manager who directly interacted with a finance lead on projects, told us:

“They [the project’s experts] asked me to do every machination to try to make a CapEx versus OpEx.”

Example: Equinix Would Press Vendors To Create Unique SKUs To Lump Basic Operating Costs Into Larger Purchases, Then Record It As CapEx, According to a Former Director

A former director described how this worked in practice:

“So you can look for, even as far as buying tool sets. So one might not qualify. But if you go over a certain threshold and you buy a set of them, maybe five of them… that’ll count towards your CapEx.”

They continued, detailing how they would ask vendors to create new SKUs for them:

“You can also work with your vendors, your suppliers and create unique SKUs. So if I was going to buy a tool set that was say $500, right. Had a single SKU… Initially that would be considered OpEx. But if you went to your vendor and you said, ‘hey, why don’t you create a SKU with a five pack of those tool kits and get me a $2,500?’ Now it’s CapEx.”

They said it was easy to convince vendors to do so:

“…it’s very easy to talk to your vendors and say, ‘hey, can you create a new SKU?’ Who’s going to turn down business for that? It’s just as easy for them to turn that around.”

The Company Would Change The Wording Of Operating Expenditures To Make Them Sound Like Capital Improvement Projects, According To A Former Director

Another technique used to shift operating costs to CapEx was to change the wording of the project to make it sound like a capital improvement, according to a former director:

“The other way, what happens is basically wording in such a way that it sounds like it’s a capital improvement. You can get very creative with language.”

Equinix Lumps Smaller Expenses Together In Order To Inappropriately Book Them As CapEx

“Oftentimes, People Or Groups Would Try To Bundle Things To Make Sure That They Were Capitalized” – Former Executive

GAAP accounting practices permit a threshold where expenses below a certain level are considered OpEx, per a PWC guidance note. The intention of the rule is to make it efficient to book immaterial operating expenses (e.g.: office supplies, postage, et al.)

But rather than use this threshold as intended (to conservatively book operating expenses) Equinix viewed it as a target, according to interviews with former employees. In other words, the company would bundle operating expenses together to make the totals high enough to overcome the threshold, in order to capitalize them. This practice, effectively a capitalization threshold, contravenes GAAP practices.

In our conversation with one senior leader at the firm, they told us:

“If it was over a certain dollar amount, which typically it was, it would have been treated as a non-recurring CapEx… It tended to change. I believe ours was in the $10,000 range. Which that wasn’t actually a very big check.”

They explained that everything below the threshold would be expensed:

Hindenburg Researcher: “Was it written up as a threshold of everything below was operating expense and therefore above you could capitalize?”

Former Executive: “Yes. Oftentimes, people or groups would try to bundle things to make sure that they were capitalized.”

A second former employee told us that $2,500 was his minimum to categorize expenses as CapEx:

Yes. There’s a minimum, I believe for some it depends on which items, but I believe it started off as $2,500. And then you just work your way up from there.”

A third former employee, a finance director, confirmed this was also the case for his team, saying:

“Minimum threshold for capitalization. Yeah, I think it was 3,000, if I’m not mistaken.”

They continued explaining in practice how this could be applied to purchases of things like cabinets by bundling them together:

“If you just buy one of them it has to be expensed then immediately…So and sometimes you can actually capitalize these things if they are purchased in bulk, like if you buy, for instance, 20 cabinets in one go, then you can capitalize them.”

Equinix’s Key Competitor DLR Abandoned A Similar Practice Of Using A Capitalization Threshold Over 11 Years Ago, To “Be More In Line With GAAP Accounting Practices”, Per Its CFO

Equinix’s closest listed peer, Digital Realty (DLR), specifically stopped its practice of using a capitalization threshold 11 years ago in 2013 to “be more in line with GAAP accounting practices”, per its CFO.

DLR’s CFO said on its Q2 2013 earnings call:

“Today, we are capitalizing what’s appropriate to capitalize down to any amount, which is really consistent with GAAP…The $10,000 and lower policy was a holdover from our IPO days when we had limited resources and there was a question of our ability to track, from a capitalization standpoint, expenditures of $10,000 or less.” (Cited in industry media reports)

In 2014, in follow-up correspondence with the SEC, DLR confirmed that it had refined its capitalization policies and eliminated the threshold. [Pg. 3

Part 3: Overselling Power

As Equinix’s accounting has worked to classify operating expenses and maintenance CapEx as growth CapEx, our research shows the company has perennially underinvested in actual growth infrastructure.

Instead, it has quietly relied on a risky approach to growing revenue: overselling power capacity in the hope that customers won’t increase their usage up to the power they’ve contracted for.

At The End Of 2023, Equinix Reported It Had 79% Utilization Across Its Data Centers, Implying Significant Growth Runway With Its Existing Infrastructure

Equinix, in its financial statements, discloses the “utilization” of its facilities which currently stands at 79% across all regions. [Pg. 22] The metric, which is based on the utilization of cabinet space, gives investors the impression that Equinix has plenty of growth runway with its existing physical infrastructure.

But beyond cabinet space, another key requirement and a constant growth challenge for data center businesses is power.

Equinix intentionally does not disclose the power utilization across its data centers to investors. During its Q4 2023 conference call, Equinix’s CFO responded to a question about investor disclosures by saying that power wasn’t the “right” metric to share:

“As it relates to some new metrics, we’re continuing to review the data sets…Power just doesn’t feel like the right metric to be sharing given the nature of our business model relative to others.”

A Former Executive Told Us “The Dirty Secret” Unsaid By The Company’s Limited Disclosure Was That Equinix Oversold Power Capacity, Stretching Its Infrastructure To The Limit

Multiple former employees explained that the nature of Equinix’s business model involves overselling and sometimes even double selling power to its customers. One former executive told us:

“…we, Equinix, oversell capacity, as the dirty secret of the data center world…”

The idea is that Equinix can oversell power in the hope that customers don’t grow into their contracted levels, a balancing act that can work if customer power usage rates don’t increase.

In brief, Equinix doesn’t have enough power at some of its facilities to satisfy its current customer contracts, according to former employees. To date, this lurking risk hasn’t severely hampered the company’s financials because customers have used less power than they are contracted for overall.

Analysts, guided by Equinix’s cabinet “utilization” metrics seem unaware that the key utilization risk is currently power. For example, a November 2023 Deutsche Bank research report highlighted how Equinix’s new cabinets can support around 5.7kw (kilowatts) per cabinet without reference to the stress this puts on power utilization.

(Source: Deutsche Bank Equity Research Report, November 2023)

“The Whole Thing Is Like A Little Bit Of A Shell Game,” One Former Executive Told Us

Another Said: “Overselling Is A Big Thing In The Data Centers…Depending On The Customer Mix That They [Equinix] Have There, They Can Sell 120%

Despite the lack of disclosure around Equinix’s practice of “overselling” power in data centers, a former Equinix executive in Europe explained this was prevalent:

“Overselling is a big thing in the data centers… depending on the customer mix that they [Equinix] have there, they can sell 120%.”

Another former executive told us that power overselling could be as high as 175%:

“Most Equinix data centers are what they call over-utilized anywhere from 120 to 175% of power.”

They added:

“They’re double selling the power as well. The whole thing is like a little bit of a shell game.”

Another former data center manager in Europe told us that Equinix oversold power, acknowledging that it posed risks to the company:

“If they’re not going to use it [power], then you can make a decision. Okay, we’re going to  oversell some kind of contract… Then you have capacity which you can resell again to other customers… 110% or maybe 115% [of oversell]. It’s a risk.”

A Former Executive Confirmed The Risks Of Overselling Power Include Facility Outages And A Failure To Fulfil Contractual Obligations

These Risks Represent “A Very Significant Reputational Challenge” When Customers Realize Equinix Cannot Provide The Power They’ve Paid For

Former executives and engineers at Equinix told us the company will have to outlay significant CapEx to try upgrade its facilities to satisfy current contractual obligations. Per one former executive on the risks of overselling capacity:

Hindenburg Researcher: “The risk is basically outage. Is that right?”

Former Executive: “Yeah, Yeah… And it would be a very significant reputational challenge to mend I think in order to explain why suddenly you sold capacity you didn’t have.”

Taking these risks hasn’t always worked out. Equinix’s failure to provide sufficient power was the subject of at least one customer lawsuit. In December 2021, Blade Global alleged that it paid over $1 million to Equinix to secure space and power, but when it came time to use the space, Equinix acknowledged that its “servers would require more CFM [cubic feet per minute] of cooling than its New York facility could provide.” [Pg. 4]

Beyond the historical challenges of managing power, the dynamic could reach a breaking point with a wave of expected power-hungry machine learning and artificial intelligence (AI) workloads by customers.

The Growth Of AI May Double The Power Demands Of Data Centers Within 2 Years, According To Industry Research, Posing A Threat To Equinix’s Power-Constrained Facilities

The increasing use of machine learning and artificial intelligence across industries is expected to double data center power demand by 2026, according to predictions by the International Energy Agency (IEA).

(Source: Industry publication DataCentre Magazine citing IEA reports.)

Equinix Positions Itself As A Way To Play AI, But Former Executives Confirmed The Rise Of AI And Machine Learning Workloads Will Strain Power Capacity

Former Executive: “That’s A Big Problem Because Every Single Site In The Estate Is Oversold By 25%”

With the rise of AI, the market seems to be rewarding Equinix with rich multiples as though it is an AI play. Equinix has attempted to harness this hype in its investor materials, highlighting that AI was “aligned with Equinix advantages” in its June 2023 analyst day presentation:

(Source: Equinix Presentation [Pg. 27])

In December 2023, an industry expert quoted in an Equinix press release stated that there has been increasing demand for “data-intensive and high-compute applications like AI.”

Further, AI workloads are expected to increase even more, potentially surpassing 60Kw per rack, according to Dell’Oro, a market research provider.

A former Equinix executive told us this could be a “big problem”, believing it would require rolling back contracts to address the new wave of power requirements:

“That’s a big problem because every single site in the estate is oversold by 25% and there’s no easy way of fixing that. You can’t just inject capital to fix it. So I think that again, one of the challenges that they’re going to struggle with is how they now reel back some of those contracts to be able to support the capacity they actually have.”

A former Equinix Sales Director was doubtful that Equinix could meaningfully upgrade power in its old facilities:

“I think Equinix is going to have a very, very hard time retrofitting the data centers to get that kind of output in their existing sites.”

“I would say many of the sites that were built prior to 2019, probably, will be very hard to retrofit for liquid cooling or for any kind [of upgraded cooling]…”

Speaking about the application of AI, a former Equinix infrastructure engineer told us:

“Let’s just say anything that’s at least ten years old is going to have its challenges handling any of this stuff.”

Another former engineer in Europe described that many of Equinix’s retail colocations facilities were not ready for AI-related workloads:

“They will have to rethink their entire design standards. For me, at the moment, the design standards does not allow for AI deployment for the colocation. That’s my opinion. They will have to rethink.”

Finally, another former executive told us that even some of Equinix’s new facilities would have trouble accommodating AI workloads:

“Equinix has footprints that are built to two kW, you know, four kW. And these are really, these are the oldest of the oldest facilities. But even their modern facilities struggle with eight kW.”

Part 4: Equinix’s Core Businesses, Comprising ~87.4% Of Revenue, Are Being Disrupted by Large Cloud Providers Like Amazon, Google & Microsoft, Collectively Called “Hyperscalers”

We believe the market has ignored Equinix’s key business risks, as exemplified by all but 1 of 28 market analysts having either a “buy” or “hold” rating on the name, per Bloomberg.[14]

The growth and predominance of large cloud providers (“hyperscalers”) like Amazon, Google and Microsoft is an existential threat to Equinix’s two main revenue sources: 1) colocation (70.4% of revenue in 2023) and 2) interconnection (17.0% of revenue in 2023). [F-58]

Historically, enterprise customers would purchase physical rack-space from data center operators like Equinix (called “Colocation”). From there, those customers could also benefit from interconnection – the ability for customers to connect and transfer data to other customers or external parties from its data centers (either virtually, by a physical wire or externally).

The continued growth of the cloud market now threatens to make both revenue sources legacy businesses because:

1. Customers can access storage and software from cloud providers like Amazon, Google and Microsoft, without the need for Equinix’s data centers (colocation).

2. Customers are no longer reliant on Equinix’s interconnection network and can interconnect within the cloud environment or through other third-party software providers.

The overall cloud market is expected to grow by 20.4% in 2024, according to industry research by Gartner. By 2025, 95% of new digital business is expected to be deployed in the cloud.

Our research, including interviews with customers and former employees of Equinix, highlights the risk to both colocation and interconnection revenue.

#1 Colocation (70.4% of Revenue): Equinix Is Losing To Amazon, Google, And Microsoft As Customers Move To The Cloud

New digital business will almost exclusively be captured by cloud providers, per the Gartner report. Amazon, Google and Microsoft have 67% of cloud market share in Q4 2023, per Synergy, an industry market research firm.

This means Equinix’s traditional enterprise customer base, consisting of telecoms, small businesses and large corporations are moving away from colocation providers like Equinix.

A survey by Morgan Stanley in April 2023, found that over the last 5 years, workloads in colocation facilities (like Equinix) had fallen from 15% in 2018 to 7% in 2023. Meanwhile, workloads in the public cloud increased from 7% to 29% across the businesses surveyed. The report predicted that colocation providers like Equinix “could be pressured” as a result.[15]

(Source: Morgan Stanley Research)

Hyperscalers Are “Essentially Controlling The Relationship With The Customer” – Former Equinix Executive

The Changing Industry Dynamic Has Slashed Margins, With Further Commoditization Expected To Continue

Given the rise of cloud providers, the dynamics of the market are now changing, with one former Equinix executive telling us:

“They [hyperscalers] [are] essentially controlling the relationship with the customer”.

This shifting power dynamic has slashed pricing power as hyperscalers seek to compete on cost. A former Equinix marketing head told us:

“Those hyperscalers, they just want to drive everything down to commodity price”.

The former executive explained that even when hyperscalers like Amazon were buying Equinix rack-space, they were eroding Equinix’s pricing premium, paying a third of what normal enterprise customers pay.

Sometimes the hyperscalers would even use their pricing power with Equinix to cut Equinix out of the higher-margin business:

“They [hyperscalers] were buying more capacity than they needed, so they could sublet it to some of those same telcos and enterprises. So if you imagine like an AWS… probably paying Equinix something like 80 USD per kilowatt of capacity per month, right? Yeah. An enterprise might be paying 240 [USD per kilowatt]. So 3x the amount.”.

Another former Equinix operations director suggested that the cost benefits of hyperscaler cloud services were clear versus Equinix:

“AWS is in some cases, they’re not necessarily the market leader when it comes to price, but certainly much less expensive if you’re working with AWS directly as opposed to working with Equinix. I believe that Azure, Google Cloud, Oracle Cloud, those are all options that you can get at a much-reduced price than even AWS at this point.”

Examples: 4 Of The World’s Largest Financial Exchanges, All Customers Of Equinix, Have Announced Plans To Move To The Cloud

Major existing Equinix customers are beginning this migration to the cloud.

In several high-profile examples, 4 of the world’s largest financial exchanges (all existing customers of Equinix) have announced plans to move to the cloud. These include the CME Group, Nasdaq, London Stock Exchange Group (LSEG) and Deutsche Boerse.

(Source: Nasdaq)
ExchangeCloud ProviderDate of Cloud Announcement/ Investment/PartnershipDetails
CME Group (Chicago Mercantile Exchange)GoogleNovember, 4th, 2021Google invested $1 billion in a 10 year partnership to help CME Group migrate trading to the cloud.
NasdaqAmazonNovember 30th, 20213 Nasdaq markets have moved to AWS’s cloud so far. [1, 2, 3] Additional ones are planned.
London Stock Exchange Group (LSEG)MicrosoftDecember 12th, 2022LSEG to spend $2.8 billion on Microsoft cloud services & infrastructure in a 10 year partnership, with Microsoft to acquire a 4% stake in LSEG, per a press release. Head of Cloud at LSEG even stated 60% of business will move to the cloud, in a deleted website post.
Deutsche BöerseGoogleFebruary 9th, 2023Google will develop post trade solutions, market operations and data in the cloud along with Deutsche Böerse in a 10 year partnership, per its press release.

The announcement of cloud transition from leading exchanges is not unique to the financial industry but seen across multiple industries. As leading industry magazine Dgtl Infra observed back in 2021,  “hyperscale cloud providers are winning customers from retail colocation”. It is this trend that it is putting pressure on Equinix’s core business.

Equinix’s Attempt To Target Hyperscalers With An Offering Called “xScale” Is Losing Due To Its Cost Disadvantages

It Generates Only ~1% of Equinix’s Revenue, With Former Employees Describing It As An Option Of Last Resort For Customers Due To Cost

As the market has rapidly shifted to low-cost, commodity-like cloud providers, Equinix has tried to respond. In 2019, the company launched its xScale brand, a specific offering for hyperscale customers.

At the time, CEO Charles Meyers said he was “tremendously excited” by the launch and believed it would “differentiate Equinix as the trusted center of a #cloudfirst world”, per a post on Linkedin. At a March 2022 investor conference, Chief Accounting Officer Simon Miller reinforced the firm’s conviction saying, “we’re looking to double and triple down on xScale”. [Pg. 1]

However, uptake has been minimal, with xScale contributing only an estimated 1% of the company’s total revenue, based on Equinix’s 2023 Investor Day presentation. [16]

Former executives told us that the slow take rate was due to Equinix’s inability to compete on price. One former executive told us that Equinix would usually be the last option:

“It’s getting to the point where, if Equinix is the only product in the market and it’s the only available capacity, then they’ll sell that capacity…. But when your cost structure is 20 or 30% higher, and in the hyperscale side, yields have been compressed down to the point where they’ve kind of bottomed out. So basically, if your cost structure is 20% higher, then your rates are going to be 20% higher, and therefore you’re going to have a hard time selling it.”

Another former executive corroborated that Equinix’s cost to build capacity left it at a competitive disadvantage:

“So Equinix when I left, was spending something over $17 million per megawatt to build capacity. And that’s kind of all right when you’re selling to enterprises, because enterprises and telcos pay significantly higher prices than the hyperscalers. But you can see the kind of trajectory of Equinix’s business where, you know, essentially more and more capacity was being sold to the hyperscalers at lower and lower margins.”

The first former executive instructed us to simply discount anything Equinix management was saying about hyperscalers:

“In the hyperscale side, I would discount whatever they’re [management] telling you on that side… if they’re tying a bunch of their growth to the hyperscale side, I think that’ll be dampened somewhat. And I don’t think they’ll be as big a player in that marketplace.”

In short, Equinix is losing its core set of enterprise customers to the cloud and is unable to profitably benefit from the trend.

#2 Interconnection (17% Of Revenue): Interconnection Growth Between 2018 – 2023 Has Slowed From 17% to 3%

Customers Are Bypassing Equinix’s Interconnection Network By Connecting Directly Within The Cloud Or With New Third Party Software Applications

After colocation, “interconnection” is Equinix’s second largest source of revenue, accounting for 17% of 2023 revenue. [F-58] Interconnection is a service that allows customers to connect to each other virtually, by a physical wire, or externally.

According to a former global marketing executive we spoke to this is the core value proposition of Equinix:

“The Equinix value proposition would be, which of these accounts would have the greatest need for interconnection services.”

This is consistent with what senior executives have said publicly. The Chief Accounting Officer, Simon Miller, said in a 2023 conference:

“We focused really since day one on our founding, on network neutral interconnection. And so you hear us talk a lot about the value of interconnection. And what that means for us when we’re building out business cases for development…” (June 6th, 2023, NaREIT conference)

However, between 2018 and 2023, the growth rate of total number of interconnects – both virtual and physical – has decreased significantly from 16.7% in 2018 to 3.4% in 2023. [1, 2]

(Source: Equinix Earnings Presentations [1, 2, 3, 4, 5, 6])

The reason for this is yet again due to growth of the cloud. As more customers move to cloud hyperscaler platforms, providers have developed options where customers can bypass interconnection offerings either 1) by connecting directly to other customers within the cloud; or 2) by using new technology that allows interconnectivity between multiple clouds.

Cloud Providers, Such As Amazon, Now Have Services That Can Bypass Equinix’s Interconnection Network

Many of the hyperscale cloud providers, like AWS, Google and Microsoft now offer services within the cloud environment that help customers effectively “bypass” the need for Equinix interconnection points (also referred to as an “on-ramp” point). [1,2,3,4,5] This is offered between customers using the cloud providers or between regions of the cloud provider.

(Source: AWS SiteLink Press Release, one of several offerings to facilitate interconnectivity)

A former Equinix marketing head provided the example of Bloomberg, a legacy Equinix customer that now offers the ability to connect directly within Amazon’s (AWS) cloud environment:

“What Bloomberg is now doing is: ‘hey, well, if your application is in AWS, we’re also in AWS and you can connect with [us] directly in AWS’.”

New Cloud “Aggregators” Called “Cloud Native WANs” Are Also Emerging, Further Challenging Equinix’s Interconnection Network

Former Equinix Marketing Executive “You Could Just Interconnect With One Of These [Rival] Software-Based Provider[s] And Through Them Reach Everyone You Need To Reach”

The rise of the cloud has resulted in other services springing up to connect and transfer data between providers like Google, Amazon and Microsoft.

A 2022 S&P Global Market Intelligence report noted the early threat posed by what are known as cloud-native WANs; companies offering software to enable interconnection in the cloud.

The cloud-native WAN market is already becoming highly competitive with offerings from numerous providers including Cloudflare, Aviatrix, Akamai, and Alkira. These firms offer cost-effective and easy-to-deploy solutions, as a former Equinix marketing executive reflected:

“You could just interconnect with one of these [rival] software-based provider[s] and through them reach everyone you need to reach”

Equinix clearly recognizes the threat, and launched its own solution in January 2024 called Equinix Fabric Cloud Router. The offering is a late entrant, while incumbents have already gained ground.

Just As With Colocation, Hyperscalers Are Also Driving Down Price Of Interconnection, With Some Customers Even Paying Nothing

“Board Level…This Is A Serious Concern Because Hyperscale Is Paying Nothing For Cross-Connects” – Former Executive

Interconnection is a highly profitable business for Equinix. The CEO Charles Meyers even referred to it as the “quote, secret sauce” of Equinix in a March 2024 investor conference. [Pg. 2]

The cost to add another interconnect point is minimal and can be as simple as running a cable to a rack. As one engineer explained:

“Cross connect is a fancy word for a patch, basically… We run a fiber cable from that rack to what we call a ‘meet me’ room. And then every rack goes back to those ‘meet me’ rooms. And then if a customer wants a connection, it’s just a simple patch between them.”

A former executive told us that hyperscalers were driving down the pricing of interconnection, sometimes even paying nothing:

“Board level… this is a serious concern… hyperscale is paying nothing for cross-connects and your average enterprise is paying 1000 bucks for that same cross-connect per month, and your capital investment in it was nothing.”


The greatest technology companies in the world lead with innovation. Armed with superior products and services, their revenue growth, margins and positive financial metrics naturally follow.

When technology companies lack innovation and face stiff competition, or even obsolescence risk, they sometimes grasp for the appearance of success instead.

Equinix has historically benefitted from industry tailwinds as global demand for data has increased. But now, with the rise of cloud service providers, it faces unprecedented competition and commoditization risk in its core product offering. As a result, its growth is slowing, and its margins are compressing.

Unable to address these challenges with product innovation, management has instead resorted to financial engineering. As growth has slowed, management has created the illusion of continued innovation-driven growth investment through sheer accounting manipulation. As operating costs increase, Equinix’s ‘creative’ accounting has given the market the false impression of a company that is a cost leading outlier in its industry.

This false impression, combined with general market euphoria for AI, has resulted in investors rewarding Equinix as though it is a key AI beneficiary, when the opposite seems true: AI poses a risk to Equinix’s already power-constrained facilities. The lack of market awareness of this risk has been a result of management’s deliberate lack of disclosure related to its power capacity.

None of these issues seem lost on management and insiders, who have been awarded compensation based on manipulated AFFO metrics and have cashed out $476 million since the company’s conversion to REIT status, including over $100 million since 2023.

As of last week, Equinix’s CEO and Executive Chairman announced plans to step away from their roles into lesser titles, tossing the baton (and the potential wreckage) over to a new CEO as they tiptoe into the background.

All said, we believe Equinix’s hefty valuation premium, claimed market leadership, and growth prospects will soon reverse course.

Disclosure: We Are Short Shares of Equinix, Inc. (NASDAQ: EQIX)

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[1] GAAP refers to Generally Accepted Accounting Principles used in the U.S.

[2] On a Compound Annual Growth Rate (CAGR) basis.

[3] We calculate growth CapEx as (total capital expenditure – recurring capital expenditure)

[4] On April 3rd, 2020, William Luby bought 5,000 shares per FactSet.

[5]  Capital expenditure (“CapEx”) is the amount of money used by a company in purchasing, maintaining or upgrading its assets. Unlike regular expenses, these are expenditures that benefit the business over a long period of time, rather than just to keep the business running (i.e., operating expenses or OpEx).

[6] REITs like Equinix split capital expenditures into recurring (sometimes called “maintenance”) and non-recurring (“growth” or “expansion”). Generally, recurring CapEx is thought to comprise maintenance and replacements, while non-recurring, as the name suggests, is inherently a one-off or infrequent expenditure.

[7] The last reference we saw to ongoing capital expenditure was in the 2015 Q4/year-end results release. [Pg. 9] References to “ongoing capital expenditure” had disappeared following the 2015 Annual Report, by which time the company began referring to it as recurring CapEx, possibly as an attempt at a legal shield to explain what would be massive discrepancies in the reported metrics. According to a Barclays report on September 22nd, 2022, analyst Brendan Lynch wrote “based on 10K filings we do not see a functional difference in the definitions.”

[8] Around the time of its transition to REIT status, Equinix re-defined its calculation for maintenance CapEx (then called “ongoing” CapEx), foreshadowing management’s focus on altering the reporting of this metric. The revised definition included vague and discretionary categories like “Special Projects”, which management would lump into its new non-recurring (i.e. growth) CapEx category, per its June 2014 company presentation.

[9] Based on the 2014 maintenance CapEx/total revenue ratio of 9.3%.

[10] We estimated the average of Equinix’s data centers by taking an average of the acquired/leased dates, per its 2023 annual report. [F-61 – F-67]. For example, in 2014, Equinix told investors 26 of its US IBX data centers had an average age of 8 years, per its Q1 2014 earnings presentation. [Pg. 18] Today, when considering all of its data centers in the US, the average age is 13 years old. Across all its data centers globally, the average age is 10 years old. [F-61 – F-67].

[11] For each year from 2015, we calculate 9.3% of revenue as a “pro-forma” maintenance CapEx. We then subtracted reported maintenance CapEx to yield the incremental maintenance CapEx (i.e. the estimated overstatement).

[12] This can be verified in proxy statements from 2016-2022. [1, 2, 3, 4, 5, 6, 7]

[13] This is found in “Summary Compensation Table” in the Proxy Statements.

[14] Out of 28 analysts, Morningstar’s Matthew Dolgin was the only sell as of March 2024.

[15] Morgan Stanley Research, April 12th, 2023, “Cloud Optimization: Short Term Pain for Long Term Gains”

[16] For 2023, Equinix estimated unconsolidated revenue from its Joint Venture partnerships of $412 million. Assuming a 20% share yields $82.4 million.