Chit Chat Stocks - Equinix (EQIX) with Braden Dennis

Episode Date: June 23, 2022

Equinix is a digital infrastructure company. The company owns the infrastructure that allows other enterprises to operate as efficiently as possible in the digital world. Listen as Brett and Ryan ask Braden questions about the company, its business model, and valuation. Enjoy the show! This episode is sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android Subscribe to 7investing with the code "Money" and get $100 off: https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested to see more of Braden's work? Find him on Twitter here: https://twitter.com/BradoCapital?s=20&t=txeDD854WWbQae1g8v2RxQ Contact us: [e-mail]  Timestamps Equinix | (4:35) Value Proposition | (13:25) Competitive Advantages | (21:11) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive episode. And today we have on Braden Dennis and we're talking Equinix. I say it wrong pretty much the whole episode until Brett corrects me. So apologies in advance for that. Well, you had the Equinox in your head. Right. But this is a real estate investment trust and they own primarily, or I think entirely, data center or data centers. So you can already- Or the real estate around the data center. stuff like that. Right. You can guess sort of the tailwind that they've had and they really

have been a strong compounder and Brayden goes into that. And we also go into a little bit about his business that he talks about, and it's actually pretty fascinating. So feel free to check it out. It's stratosphere.io. But before we get to the interview, we want to talk about our friend, our sponsor, Corder. I have been using them quite frequently as of late. They are an investor relations app where you can listen to conference calls. You can read conference called transcripts. You can also check out presentations all within the app, even investor days I'm seeing go up on there as well. They're innovating all the time. It's a very early company and the product keeps getting better and better. Yeah. And if you don't have the time to sit down

and read it, it's easy to just plug it into your, listen to it in the car, throw on some headphones, listen to a conference call that way. Or if you want to sit down and read it and you can't find the transcripts anywhere else, this is a perfect place to do it. I do that a lot. Sometimes they're the only ones with them. So feel free to go check them out. It's Q-U-A-R-T-R. There's no E, quarter, Q-U-A-R-T-R, 100% free. They've got basically every company you could think of. You can also follow them on Twitter at quarter underscore app. Without further ado, let's get to the interview. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of

investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. Today, we are joined by Brayden Dennis. He is an investor on Twitter. That's how he founded, but also the founder of stratosphere.io. I've seen some of the stuff from your Twitter profile on it, but can you explain what it is and kind of give the elevator pitch for Stratosphere? Sure thing. It is a web-based

financial data platform. And so we bring in all the company fundamentals, 10 years of historical data, really nice, beautiful data visualizations. And the key differentiator that I think is the key point indicators of the business as well. So today we're going to talk about Equinix. A perfect example of a key point indicator for Equinix is interconnections. So we track that on a 10 year plus basis. And you can't really find a lot of that stuff anywhere. So that's, uh, that's basically the elevator pitch. Thanks for having me on though, boys. I really appreciate it. Oh yeah. No problem. And how, uh, I know stratosphere is kind of a, you know, it's kind of a new venture. So how many years have you guys been going? And is there a lot of, you know,

improvements on the way? Cause I know it's, it's been a work in progress. You're getting better all the time. Yeah. We we've been moving so fast. I mean, I used to work for the government. I'm in, I'm in Canada. I used to work for the government and I couldn't handle the pace. It wasn't for me. And now I think about like how fast we move product, how fast we can like develop the platform. And it blows my mind. So we launched it in November of last year. And here we are, you know, it's June 14th recording today. So it's been less than a year. Wow. That's exciting. I do like the visuals that you guys have. I saw the Autodesk free cash flow after the cloud migration, and it just put things in perspective for me. I recommend everyone go check it out.

But we're talking Equinix today. I believe the ticker is EQNX. Not to be confused with Equinox, the gym. This is a different business. So can you talk about how you found it and then maybe some of the history of the business as well? Sure. I first stumbled upon Equinix when I was originally researching American Tower, ticker AMT. It's a beloved compounder. I think Chuck Akers owned it since before I was even born, basically, one of those stocks that he's 100 baggered a couple of times over on. And while they're completely... Well, they're not completely different businesses, but they are different businesses. American Tower is almost twice the market cap of Equinix. And during my research of American Tower, they were talking a lot about the data center business as a new venture for them. And eventually in November of 2021, American Tower announced that

they're going to buy CoreSight, which is an Equinix competitor, much smaller than Equinix, but this was their foray into the data center business from American Tower. So that's basically the same time we started tracking both their KPIs on stratosphere.io in the spring of 2021. So from then, I became quite compelled to keep researching this business because there are so many underappreciated network effects in this infrastructure play. And you don't really think of network effects when you think of infrastructure. When you think of network effects, you're thinking of Facebook and even Costco, more members, more buying power, more members, this positive feedback loop. And when you have more co-location and more

interconnection, which we can get into, the actual product becomes so much better. And so I became pretty fascinated with this business. And yeah, that's how I stumbled into it. Okay. And then you want to go through some of the history to give people some context on where they are and how they got to where they are today? Yeah. Yeah. Sure thing. So it is perhaps immeasurable, but in my view, it's one of the most overlooked, least understood, least talked about large caps, from my opinion. I mean, you guys are on Twitter as well. You don't see much on Equinix, right? And it's a 65 billion market cap company. And keep in mind, this is off a 22% drawdown as of today. And so it is a digital infrastructure

company founded in Silicon Valley in 1998 by Jay Adelson and Al Avery. They were working at a digital equipment corporation, and eventually it got acquired by Compaq. So if you remember Compaq, the one with the Q at the end, that was in the late 90s. Immediately, these guys started working on something called Equinix. And so I was in preparation of this. I was watching an interview with Jay Adelson. And he talked about the internet being the complete wild west, right? And it was. I mean, if you guys remember back then, it was completely the wild west. And there was no infrastructure set up for real commercialization of commerce. It was just a place for nerds and hobbyists to hang out. It was not actually properly set up for this commercialization

that's become. So they knew they had to take on this project and they felt quite compelled. And so they actually went public right away because that's what was hot back then. If you think about that era, everything went public. If it was internet related, go public, cash out huge. Doesn't matter what your company does. If it's .com, if it's internet infrastructure, your company's worth a lot of money at this time. So the company went public in August of 2000. Was it essentially the same business or same model that it is today? I mean, obviously it's bigger, but they were doing the exact same thing. they were setting up infrastructure for connectivity around the world and i know

that's a broad statement but to answer your question like really simply no it's changed a lot like what they focus on now today and like huge growth engine for them is like the hyperscaler cloud businesses which didn't exist back then right so it's it's changed in a way like they've introduced like this this thing called the fabric which does they can do like digital connection whereas before back then it was mostly like metal providing metal for the servers uh in actual data centers and an actual connectivity between uh the open internet so it's changed quite a bit so they went public in 2000 um at four dollar four hundred and twenty dollars a share in 2003 the stock traded for as low as three dollars it was actually two dollars and ninety

cents. And so it was absolute destruction post IPO. Okay. And is there any other important metrics or not metrics, excuse me, any other important events in their history until we get to kind of the hyperscale era? Because that's the next topic I have. I think from then, like, I mean, it changed so much. I mean, I was pretty well too young to really know for the most part how the internet was changing, other than like, you know, all of a sudden you come home from school and you can play video games on the internet. And so, of course, so much changed in terms of connectivity. One of the biggest things and changes that kept happening is speeds, reducing latency. And they still talk about this to this day, right? There's the next phase of

reducing latency in 5G and more connectivity at the edge. And this is what Equinix works on a lot today. But over time, consistently, the reduction in latency, the ability for us to have this podcast conversation in real time, there's no delay. It's wonderful. And so there had to be so many iterations, not only on the software side, but in actual infrastructure and connectivity, and Equinix has been a really big part of that. Okay. And the first thing you look at their website, you see that they highlight the three huge customers, which is Google Cloud, Amazon Web Services, and Microsoft Azure. And those are monster businesses that provide a ton of demand. So I guess you kind of get confused. You're like, okay, what value is Equinix providing? So what

do they do for these customers? And I don't know, what are the services? Yeah, good question. And I know it's like, okay, I get it. They're providing services, infrastructure services to the big three hyperscaler giants. And you're like, that's got to be good, right? You see an AWS logo, you see an Azure logo, and you're like, where do I sign up? Where do I buy shares? And the reality is that it has become a very important driver for this business. And there's something under the surface and what I was hinting at before with this underlying network effect that is really driving a lot of value for this company and their customers. So yes, if you want to be close to Azure, you want to be close to AWS, and you want to be close to Google Cloud Platform, and of course, there's others as well, you can co-locate in the same facilities as them and have direct private connections to these hyperscalers.

again, reduces latency. It has this instant connectivity. And so this is really important for them. So not only housing those companies is big business for them, but as companies look at hybrid clouds, moving more workforce to public and hybrid clouds from private workloads, this is big business for them. So at the core, Equinix sells three things. It's really simple. So this is their three value propositions that they give their customers. Space, power, and interconnectivity. Okay, so space is pretty obvious. It's literally like square footage.

Power is to run the digital infrastructure and provide the cooling in these facilities. So power is about 12%, very steady, but 12% of their total operating costs. an interconnection, which is, again, this direct private passage inside of co-location that gives their customers direct connectivity. Again, this is huge, right? The more you have inside those facilities, the more access you have to the Azure, the AWS, and the GCPs, the better that your entire stack is going to run. miles from home and ready to start your vacation good thing you're staying at La Quinta by Wyndham they have free high-speed wi-fi to stream all your favorite movies and in the morning get fresh

waffles with their free bright side breakfast or squeeze in a workout at their fitness center either way you're ready to conquer the day tonight La Quinta tomorrow you triumph book your stay at lq.com okay correct me if I'm wrong here because I want to do an example you used we're using zoom video to record this podcast and the latency is really strong, would they go directly to Equinix and say, we can get you close to AWS and that would help with this and make them better than say Cisco or, well, Microsoft Teams is right with Azure, but any other competitors? Is that correct? You got it. That is the big value proposition. And so about 33%, I can check, 33% of revenues is from enterprises like your example, saying, we need interconnection. We need better

speeds. We need our global software stack to be fast anywhere in the world. And so Equinix can provide that. And is there a limited space among the data centers? Does that give them any sort of pricing power? I'm just trying to imagine an actual data center. There can't be that much Equinix hardware, unless it's not hardware, uh, within there. Is that, is that, is that close to being correct at all? Yeah. Okay. So I guess I can step back in a couple of ways on answering that. So Equinix owns like the shell of the building. They own the power and cooling equipment. They own the exchanges and cross connects and networking equipment between customers to interconnect. The customer owns the servers in the cabinets. The storage and

networking equipment inside of the facility is owned by the customer. And so, yeah, maybe that clears it up a bit. That does clear it up because it is, I think, all right, hopefully a lot of It is a real estate investment trust in the end, but like that's really what the business is. It's interesting. We talked about this kind of before the show or before we hit record, but you think about the internet, you really take for granted the physical side of what's going on. And so I think we're going to go through, you kind of just touched on it a little bit, but let's go through each of Equinix's business lines. Um, do you want to start with the data centers and kind of maybe, maybe provide a little more context around what that is, including like their footprint and the, the, uh, the co-location centers or services? Yeah, let's do that.

Let's talk about like where they are now and the scale and basically like their different segments. So in terms of data centers, they have 244 data centers as of their latest quarter. And so these are gigantic facilities. So we're talking about a like very significant, uh, footprint. Okay. So 244 data centers, 69 global markets, 30 countries. And so they are in everywhere they need to be to provide their network, but they're also in every major city center. So every major city center in the world, Equinix has a footprint right now. Their customers are basically a wide range, but anything from telcos, mobile providers, cloud IT service infrastructure, digital media content providers, which is a bit of a black box, that segment. financial services is a big one, right? Again, because we're talking about this thing that you take for granted. The internet has become such a phenomenal thing that just you take for granted

that it just works, right? Like it just works. You don't ask any questions and you take it for granted. And what we don't recognize is that there's literally this global network of infrastructure, whether it be the actual cables that go between them, this fly that is bouncing around in front of my face right now, or the actual data centers. And so those are their main customer segments. Now, today they have nearly 430,000 interconnections. So that is quite phenomenal given like an interconnection being like what you're talking about, Zoom wanting to get close to probably a collection of cloud providers that they work with. They wouldn't be just running off one. Some do that, but that's becoming kind of old news.

You're typically running a hybrid cloud with many different providers. It just introduces redundancy and better scalability. So 430,000 interconnections. Now, there are two main services are like network edge uh equinix fabric and so network edge is basically like again so preface here i am i am an engineer i am not a network engineer so i don't like basically what what's happening here with network edge in layman's term is you are actually getting this virtual connection so equinix metal which would be you actually placing servers inside of cabinets that's what comes from what is called bare metal as a service which has been around since the their roots of the data center so that is you co-locating with your own hardware in the data center

network edge is you actually creating digital connections virtual connections to their data centers. So this is another big driver for them. So I think I'm getting it, but maybe don't have it fully. So let's take stratosphere.io as a use case. You guys need, would it be server space, let's say, or maybe you're using AWS. Where do you connect with Equinix in that process? do you go straight to them we are going straight to aws's public cloud and so pub and and they will run that infrastructure out of a collection of data centers now and and to give you some context here of like what's out there what's out there in the market aws 42 percent of their cloud edge nodes are held in Equinix data centers. So if you think of their capacity in real infrastructure

from Amazon Web Services, 42% of those nodes around the world are held in Equinix facilities. And so the remainder is around their competitors. Like I mentioned, CoreSight earlier, Digital Realty Trust is another big name. That's probably player number two, CoreSight being player number three, and then a list of others as well. I mean, these are real estate investment trusts, so there's quite a bit of – the market is still fairly fragmented, even though there are these giants. Are they the number one player? They are the number one player in terms of data centers by quite a large margin, almost double digital realty trust footprint in terms of data centers. Why doesn't Amazon own the space themselves?

Why do they depend on Equinix for that space? It's so CapEx intensive. And so a lot of these companies will have their own data centers as well. They do that for redundancy. They do that for a variety of reasons. But to build out the entire network themselves wouldn't make any sense. Like Amazon, their CapEx is already insane. They're not going to go build 240 data center locations around the world.

Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one, so you don't have to worry about malware. Or when your kid downloads a song from a shady link. And now all your computer can play is... Red color, red color, where are you? All blocked, thanks to advanced security,

included with Cox Panoramic Wi-Fi. Advanced security must be enabled in the Panoramic Wi-Fi app. restrictions apply right okay uh let's talk about some of the competitive advantages potentially does this is this a business that benefits from economies of scale and then who you kind of talked about their competitors why why would someone choose equinix instead of digital realty trust space or are they kind of similar let me add one on top of there because this may be a dumb question because they could be a customer are like someone like cloudflare and fastly are they competing with equinix or would they go to them no so cloudflare is uh not a business i i know well

but they would not be competing with the actual infrastructure that these data centers are providing. Okay. Yeah. Different, different businesses. Again, this is a real estate play, not, um, you know, like this, this is real hard assets. Okay. All right. And sorry, I stole from the Ryan's question. Are there economies of scale here? Are we looking at it wrong? No, no, there, there, there totally are. And there's tons of deep competitive advantages that I think are highly

misunderstood, right? Like when you think of network effects, when you think of switching costs, these are not the businesses that come to mind. They're not like these hard assets type of businesses that come to mind, but we can go through what some of those are. So in terms of, I know you mentioned competition. In terms of competition, they have about 23% of the global market right now. And the next biggest one is digital realty at 5%. So player one and player two, 23% and 5% respectively, according to Evercore research. So that also gives you another little thing that comes to my mind anyway, which is lots of more room for M&A, which they do. They do lots of M&A and you can tell it's very fragmented.

It's a real estate play, right? So a lot of these companies are owned by private capital. In terms of economies of scale, one metric that we track at Stratosphere is gross profit per average data center. And it is very flat at about 14 million per data center. And you'd hope that this would kick off some more operating leverage on a per unit basis. But the data doesn't really seem that it does in this case. However, if you look under the hood at this number, you realize is that it takes years for a data center to hit maturity. And so the fact that they've grown that data center count so fast and maintained that it's positively impacting the bottom line

is pretty impressive. It's kind of like a Costco. It takes many years for each warehouse in Costco to hit maturity in terms of paying members. Now, on the operating expense side, there are some economies of scale. but it does stay pretty static. Their high line item costs are power, labor, and maintenance, to name a few. And those are pretty static per data center.

Those are not something that you're really getting in economies of scale from. So I hope that answers your question a little bit. In terms of network effects, we talked about interconnection. You know, if you, their service gets better, the more co-location they have and the more customers they have. From a switching cost perspective, you know, from contractual terms aside, you know, they're kind of locked in on these contractual terms. But that aside, a tenant begins making interconnections inside of the data centers. Like, okay, so my company is going to connect with your company, Ryan, and the other company is going to connect with Brett's company. And reversing that faces huge, huge business interruptions in your digital infrastructure. And if you were to uproot and move your servers elsewhere, a tenant pays between close to $10,000 per cabinet, and the monthly recurring revenue on an average Equinix cabinet is around $2,000.

So those unit economics for switching don't make a whole lot of sense. Plus, the service they're providing, while being fairly commoditized, no one's really unhappy with co-locating in the most dense data centers. If you're in the most dense data centers, you have the highest impact for your customers. And so from a switching cost perspective, network effect perspective, highly underrated, for my opinion. I have one question that I forgot to throw in our little note sheet here. So you might not have the answer, but I know they rent some of their facilities instead of owning. What's the rationale for either one? Why choose to rent instead of own? Are there benefits to both? It's a very small number. I believe last time I was looking at their 10K, it's only around 4%. So it is very, very small in terms of their footprint. So over 95% of their facilities being owned and operated, those would be on a case-by-case basis, I assume, whether it is a

capital requirements issue, whether it is that facility already exists and they think that it's a key location for them to actually have infrastructure connectivity because again they're trying to get their internet exchange fabric in every corner of the earth in terms of like readily available and so maybe it's on a case-by-case basis but it is it is very small okay makes sense all right uh let's move into financials because i know this is an investing podcast. So we'll get to some of the important stuff with a REIT. And you see the AFFO or adjusted funds from operation metrics across their IR page. Why is that important for valuing a REIT? And are there any other metrics? This leads into stratosphere.io, I think. So you might

have a lot of data brought up. What other metrics do you use to value Equinix? Sure. Sure. Yeah. There's a couple of KPIs we can talk about. In terms of AFFO adjusted funds from operations. So yeah, again, this is a real estate investment trust. Real estate investment trusts have to pay out 90% of cash flows to the dividend to be, or the distributions technically, since it's a REIT, to be eligible. Now, if you look at the PE of almost any REIT, you will either be pleasantly confused or very alarmed based on the company. But again, this is not the right metric. This is a real estate investment trust. So today, it trades at about 25 times adjusted funds from operations, which is quite fair. I think

it's a REIT with an actual secular trend behind it. So it's not going to trade as cheap as some slow growing residential REIT or like some healthcare hospital REIT that doesn't really grow at all. So it trades higher than that, but that's because it should. I mean, we can talk about the growth in a second, but adjusted funds for operation is our best method. And I actually think, so while I'm critical of accounting sometimes, it actually works really well. If you dig into the guts, and it's going to be different for every REIT, it's like that adjusted line on every company. It's never black and white. It's very nuanced. But if we look at what funds from operations is, which is a cash flowing metric, it is net income, add back amortization,

depreciation, and subtract capital gains from property sales. Because those are not funds that are being generated from the actual business. If I sell a bunch of property, boost my FFO, that's not necessarily good for the business. Is it like if they're liquidating a bunch of hard assets? So got to get rid of that. Now, when it comes to adjusted, now we're going to get really into what's useful for a real estate investment trust. Add back rent increases. Those are important. Those are good for the business. Add rent increases, is subtract capex, just like you would for any free cash flow type of thing, and then reduce routine maintenance amounts as well.

Beyond that, there's a long list of adjustments that are going to be made for each REIT. But this is a really key metric. If you're looking at REITs FFO or AFFO, that's the metric you want to look for actual cash flow. Pretty much anything else, not going to give you a very good number. what or how, what drives most of their growth for them? Like, is it just those rent increases that you talked about? Um, or is it like, uh, I guess maybe capacity expansion is maybe the right term. And then what are you expecting growth to look like over the next, let's say

three to five years? Yeah. Good question. So there's a couple of things at play in terms of their growth. Um, they do have pricing power, um, which is always nice. They are increasing that data center count. So it's gone up to 240 data centers just like five years ago, that was in the mid hundreds. So you can give you, it can give you a real context of like, they are really growing out this network. Um, and each, each one incrementally adds to profitability which is also nice um in terms of like growth moving forward um this is one of the easiest secular trends to get behind i mean if you really think about like this is data consumption looking long term um in terms of growth inside like we were just talking about

more interconnections. It's like a same store. It's an SSS number. So each of those incrementally provide more value for customers. Equinix charges more, building out more capacity. And so it's a really easy playbook for them to keep growing. Now, what they have achieved so far is pretty astounding. We're talking about 15% compounded annual growth rate on the top line. very consecutively. That's over the past 10 years. They're guiding this year for exactly 15% on the top line growth. Adjusted funds from operation is up two and a half times in the past five years. Really nice profit EBITDA margins, like 50% EBITDA margins, high 40s at the minimum. It's really steady as she goes. I mean, this is not some business that's going

to blow the doors off of 50% hyperscalers type growth. But three to five years, given the trends of digital infrastructure, the growth of public and hybrid clouds, this is still a tremendous growth lever for them in what is still a nascent development in terms of internet infrastructure. There are still so many workloads for enterprises that are run on private clouds. run at their HQs. They have these huge server rooms. From a cost perspective, it makes almost no sense to run private cloud, like run your own private infrastructure. Unless you're like the government or something, right? Right. Now, you can run a hybrid solution, which has like both of those things, right? You run

your private, you run your public, and you run on what's called a hybrid cloud. Most workloads are moving over to that sort of hybrid solution. And so there is still so many workloads that are moving to the cloud. So this is a huge growth driver for them. Now, I hinted at this on Twitter last night because I was listening to the conference call. 77 consecutive quarters of top-line revenue growth. This is the longest streak of any S&P 500 company right now. And it's owned by this digital infrastructure REIT. In terms of more secular trends behind it, this is for more data from Stratosphere, which is there is 175 zettabytes. I didn't even know what that was. This is 175 trillion gigabytes

by 2025 that digital technologies will require, which is up from about 55 in 2020. So you're looking at more than 3X in just five years in terms of the data requirements. And this isn't even talking about the 5G, what's going to happen there. They're providing real 5G at the edge connectivity and working. There are huge innovators in the space of actually running labs. They have these labs where the Nokias of the world, the Ericssons of the world are doing their actual R&D inside of Equinix's facilities. And so this just leads me to thought that the management team is staying ahead of the

curve, right? You want those companies developing those relationships, relying on your infrastructure to do it, right? It's almost like a Thermo Fisher, whereas they're providing all of these biotech companies the correct equipment to do R&D. And it's just like these never-ending cash flows that Thermo Fisher stays on top of. I think of it in a similar fashion with moving towards reducing latency. They talk about this ultra low latency at the micro edge.

What that means, boys, no clue. But it's obviously going to continue to be an important development. Right. What do you think of the management team? I guess, who are they? And then how important are they to, I guess, the investment thesis? The management team, so full transparency. I don't own shares.

And so I typically get way more intimately familiar with the management team when I buy the shares. But they are clearly demonstrated that they are more than capable. I mean, I've listened to several calls now. I've been following the story for a long time. Charles Myers, the CEO, who I quite admire, he's been with the business since 2010. And he bought about 25 or 30 years of experience in digital infrastructure before that. They seem very, very capable.

And when they talk about the business, they start with their wins. They're like, okay, we're up to 244 data centers. And then it is straight to the long-term. They're talking about these advancements in 5G. They're not caught in the weeds on day-to-day in the way they communicate with investors. And I really appreciate that from a long-term investor. They talk clearly, concisely about the business. They consistently hit their targets. When they say they're going to do 15% compound annual growth rate, they hit it. And so to me, it seems like there's a very

clear playbook for growth and a very clear playbook for growing interconnections, which is a very important KPI for this business. It's key to their moat and introduces network effects and switching costs and ultimately provides a much better service. The more interconnections they have, the better the actual services inside of their locations. Gotcha. And I know you did some, you post on Twitter, any questions we should ask? And there were some responses. They were pretty deep like uh specific ones did you want to hit any of those two i know there's one about energy generation and then about a 5g infrastructure lab in dallas are those important at all or should we skip to the next question yeah the dallas one is cool i was just talking about that a second ago

it's pretty awesome that they they have this right they're providing a playground for these 5g companies to do real r&d which is amazing um in terms of uh yeah i saw the question it was about like cogen i think so he's basically talking about like putting natural gas generation facilities on site um and so i i'm an engineer i used to work on a project like this we took a manufacturing plant built a cogen facility it's about four megawatts of power right on site you can take the exhaust power and use it for other services inside of the actual facility So you go from about high 30s efficiency into about 70% efficiency because you're using all the excess steam. And I was like, I don't think Equinix does that. And so I looked it up, and they have three facilities in Mexico that use cogeneration. direction. But I don't see that as a huge, huge play for them. And I think it's counterintuitive

to their goals around sustainability. So even though cogeneration is more efficient in terms of raw efficiency use of resources, it is not green. It is using a carbon fuel like natural gas. And so they have a pretty clear goal on sustainability, how much electricity they buy, which is renewable, how much they actually generate on site versus like they actually have micro solar PV systems on top of their facilities. Overall, I don't think that Cogen is a good long-term solution. I would be shocked if they went further into that. Gotcha. All right. Let's close things out. Last question here. What could go wrong with an investment in Equinix is, does it really come down to the price you pay? Is that the big

risk here? Yeah. Yeah. When it comes to risk, I mean, valuation, I mean, I don't think today's price is crazy given the drawdown that's happened today. In terms of risks for the business fundamentally moving forward. Anytime you have digital infrastructure, things can change in a blink of an eye. And so what's happening is they're moving development into what's really going to help the hyperscalers right at the edge, this 5G connectivity, ultra low latency. those things are all important. It's important right now. 2040, that's old news. And so you always have to be cautious in terms of technology. I mean, it always can change. Think of how fast the internet's changed. Now, Equinix has done the right things to stay ahead of that and make

their business more valuable over time. But of course, that's always a risk. Now, they have kept a fairly conservative balance sheet, but it's been at the expense of share dilution, stock-based compensation. Even this data infrastructure company is not safe from SBC. Shares have gone from about 50 million to 90 million in the past 10 years. So quite significant dilution for a company like this. Now, in terms of capital structure, that's always something to think about when you're looking at a very capital intensive company like a REIT, but it's a pretty conservative balance sheet, maybe at the expense of SBC. And given how steady the cash flows are, they have a net leverage ratio less than four, which is high, but not high for a REIT. And 94%

of their debts are locked into low, very, very low fixed rate agreements. These companies get some of the best financing in the entire world. So does interest rates, that could be a risk here, right? 94% of their long-term debts are on fixed agreements. Okay. So yeah, I was more, I guess, speaking on any sort of future deals that could be more of a long-term risk if they stay elevated for a while. Yeah. I mean, these types of businesses definitely like low interest rate environments, any of these hard real estate infrastructure assets for sure. I absolutely love a lower interest rate environment like everyone does. And so that could definitely be a risk moving forward. Given their structure and how conservative their balance sheet is and how much

firepower they have right now and the ridiculous amount of cashflow that they generate, it's not one that would fly up to the top of my list in terms of risk. Gotcha. That's all the questions we have did we forget anything that's important to uh equinix anything we didn't cover ryan i gotta say i believe it's equinix unless i'm saying it wrong equinix it is it is equinix um in terms of like anything that uh we may have forgotten i mean i don't think so i think just maybe double clicking on the core things that they do. They sell space, power, and interconnectivity. And really double clicking on that interconnectivity, this is the most important part of the business, in my opinion. And management reiterates that very consistently.

Because of their interconnection lead that they have built, 42% of the market share in AWS, us, 43% of the market share in Azure, 44% of the market share in Google Cloud, 56% of the market share for Oracle. And so no one's even close to the market share from these hyperscalers. 40% plus across the board, more than 50 for Oracle. And this is what's driving two things. It's driving growth and more public cloud growth for those hyperscalers, but also enterprises running hybrid clouds. They want to co-locate with the data center that can provide them the most interconnections. And the data centers that Equinix has are the most dense. The most dense being they can provide the most interconnections with the counterparties that they care about.

And so that just gives them supreme competitive advantages. And I think they're kind of running away with it right now. Okay. Well, I think that's going to do it. Um, thank you for joining us. Where can people find you? Where can people keep up with stratosphere? I believe it's probably stratosphere.io, but, uh, you just got the new, uh, URL I think, or is that, yeah, yeah, yeah. It was, it was stratosphereinvesting.com before, uh, It's way far too long to type.

That was a domain name I bought when I was maybe like eight years ago now. I was probably like, I think I was doing my engineering degree still at the time when I bought that. Now I just forked out more money that I'd like to admit for stratosphere.io, but I think it's good for the business. And so yeah, stratosphere.io,

it is a financial data platform. I also run a podcast, I co-host a podcast with my buddy, Simone, called The Canadian Investor. And for some reason, we were talking about this earlier. Everyone on FinTwit is in Canada. I'm not really sure why. It's called The Canadian Investor. It's the largest investing podcast in the country.

And I think it's pretty entertaining. That's where you can find me. Awesome. Well, that's going to do it. We want to remind our listeners that Brett and I are not financial advisors. So anything we say or discuss here on Chitchat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast.

Thank you all for listening. Thanks to Brayden for coming on. Feel free to check out stratosphere.io or follow him on Twitter. We will see you guys next time.