The Canadian Investor - The Chocolate Crisis and Should we sell this Data Centre REIT?

Episode Date: April 1, 2024

Join Simon and Braden this episode of the Canadian Investor Podcast. We start off the episode on a fun note looking at recent returns from different stocks and assets.  The rest of the episode is dedicated to the recent short report on Equinix by Hindenburg Research. Equinix is the largest data center REIT in the world and has benefited from the AI excitement that has been driving the stock market for the last 18 months. Simon and Braden share their strategies on how they approach such short reports, emphasizing the importance of not dismissing them outright but rather considering their merits critically. Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. Welcome to the show. My name is Brayden Dennis. As always, joined by straight out of the bear cave, Simon Belanger. Out of the winter, out of hibernation, we're talking about a short report here today.

Oh, yeah. And you and I are going to go back and forth. This is a very rare, unique circumstance where we were both shareholders at the same time in a stock hit by a short report by a very, very well-known research firm. So this research house is not just someone off the street. This isn't just some sub stack seeking alpha article. This is the real deal. Yeah, I know. I think it'll be a really interesting exercise and people can see how we look at things when it comes to short report. I think this one was really well done and you can actually, we'll go into detail, but you can actually validate a whole lot of what they're actually saying in the short report.

So before we do that, out of the bear cave and into the sunlight, let's start a little bit lighter. Okay. You have to minimize the document or put it off screen here for this game. There you go. Okay. Because this game, you know, the results are there. off screen here for this game. There you go. Okay. Because this game, you know, the results are there. You can't look at them. A little bit lighthearted.

Let's play a game. You know, let's play one of our TCI podcast games. I want you to tell me which names of the two that I'll throw up have performed better in terms of return year to date in the year that is wrapping up Q1 2024 here. All right. ELF Beauty, two hot stocks, the two hottest mid-caps, ELF Beauty and Celsius, the energy drink company. Which one do you think has outperformed this year? Probably the Beauty one just, I don't know. I don't know the company all that well. I'll just say it's a more cost-effective beauty alternative

or makeup alternative, yeah. ELF Beauty is the number, Elf Beauty? Ash, is it Elf Beauty? Elf. Elf Beauty, there you go. Yeah, confirmed by- In-house research. Yeah.

In-house research. Number one performing stock on the New York Stock Exchange over the last five years. But Celsius has also been a hot stock. They're now in Costco in Canada too. They're everywhere. This has been in a historic rise. It's an energy drink company. And many people are drawing parallels to the rise of Monster Beverage, which is, of course, one of the greatest performing stocks in the history of public markets. So Celsius has been a really hot name. It's almost up 50% this year. Alpha is growing on

its monster a few years, up 56% on the year. All right, how about next to what I'll call, yeah, mega caps, Meta or a hot company, hot pharmaceutical company, Eli Lilly. Eli Lilly and Novo Nordisk have both been monsters in the diabetes market, I guess, insulin and GLP-1. So this year, so far this year? This year, year to date. I'm going to go meta, yeah. Two for two, sir. I tried to set you up for failure there because they've both, Eli Lilly has been a monster, but don't cock the zuck.

Meta is off to another hot, hot start to the year. And now he's a dividend bro, paying out the dividend bros their money. So Meta is up almost 50% year to date off a monster recovery last year. So don't cuck the zuck. All right. Bitcoin and Dogecoin. Simone. I think it's probably Doge to be honest.

Yeah. Dogecoin has doubled, but Bitcoin is up 65% year to date. All right. This is why I'm setting us up for the segment. Nvidia or Cocoa prices? Yeah. The commodity. Yeah, I'll probably,

I know like I was listening to another podcast. I can't remember which one it was. I would give him a shout out. I know Cocoa prices have gone way, way up because of just weather events, but I'll flip a coin, probably cocoa prices then. You just waxed the floor with this. You got all of them right. NVIDIA is almost up double, but cocoa prices started the year at $4,200 a ton.

We're about to smash through 10K a ton through a 50-year high. The articles I'm reading, we are in a chocolate crisis, Simon. We are in, alert the media, we have found ourselves in a chocolate crisis. They've surged more than 250% of the last year, 10K per metric ton, nearly double the record set 46 years ago. We have a perfect storm of things happening with cocoa prices here.

And I have a buddy, well, obviously keep anonymous, but he just started a new job at one of Big Chocolate. He just started a new job at Big Chocolate. So there's a few names that are in that mix that are publicly traded. And I just sent him the graph of the cocoa chart and I'm going, WTF, is this like explained to me? Is this a real thing? He's like, oh yeah, it's a real thing.

It's talk of the town here at Big Chocolate. And so I started to look into it more and Bloomberg, one of the opinion pieces I found, basically West Africa generates 75% of the world's cocoa and it has been a horrible yield and heavy underinvestment in the region. And so there's basically this perfect storm of underinvestment, low yields, and particularly vulnerable bad weather and disease. So it says here also, yeah, to add on that, it says here, also, yeah, to add on that, it says here, cocoa demand has doubled in the last decade. He mentions that China has eaten a lot more chocolate per capita in recent years and it's not per capita one of the highest consumers of chocolate. Switzerland and the US were one and two,

but China is consuming a lot more chocolate and they have a lot more people. So you have this kind of perfect storm, bad weather, the area is hit by disease. West Africa has heavily under-invested in the chocolate crops. And we have this rising demand of cocoa consumption, which is why Eli Lilly is surging too. It's all making sense here, right? So big chocolate and this chocolate crisis is fascinating. You see the chart and if you didn't have a label

on it, you wouldn't know if it's cocoa or Dogecoin at this point. It has gone parabolic. Yeah. I mean, my cost of living is probably going to be going up because this is the kind of stuff I eat. I love dark chocolate, like really dark. You had to run out of camera frame. Yeah. And you didn't have to run very far. No, I was kind of, we keep our storage downstairs

and I record my studios downstairs too. What I showed for people that are not on joint TCIs is 85% dark chocolate. So I know a lot of people find it too bitter. I just love the taste of really like, I don't love when my chocolate is really sweet. I just love the chocolate taste, but I don't know. I haven't seen too much of a price increase. There's probably a lag. Yeah. And I do go for the store brand, which is tends to be cheaper and they often have like two for one. So two for like $4 or something like brand, which tends to be cheaper. And they often have like two for one. So two for like $4 or something like that,

which I think it's pretty reasonable for a dark chocolate. Yeah. I find it hilarious that you give me the like one second, I'm going to go grab something out of frame. And that on the show is when you and I signal to each other, okay, you have a long segment here. I'm going to go to the bathroom, grab a drink of water or something.

You were out of the frame for only three seconds tops. So that chocolate is not far from anywhere in the Bélinger household. To my defense, it's our pantry that's kind of downstairs. So that's why I was that close. Yeah. I don't keep it on standby in case there's something. I'm just picturing every desk, just like emergency, pull this drawer if chocolate is required. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years

now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service.

Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products.

I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Okay. We started light. Let's go heavy. We're into a short report. We're going to cover it

kind of front to back. We're going to give our take. We're going to give the final verdict and you're going to kind of lead this segment. I'll jump in here and there, especially on the tech side, maybe later, but take it away for us. Yeah, exactly. So the short report, we wanted to create some intrigue. So there was a short report from Hindenburg Research for Equinix. So the Equinix is the data read that Brayden and I, like you mentioned, we both own. And I'll kind of go over how I approach short reports. And I know you approach it, I think, in a similar fashion.

Feel free to, you know, I don't want to speak for you. So if there are certain things I forgot, feel free to mention it when the way you approach them. So first of all, I don't panic. Second, I'll have a look at the high level summary of the short report. They'll usually have that. I mean, this one was the high level summary was actually quite extensive by itself. It's like, here are my bullet points, but there's 48 of them. It's like, yeah, exactly.

So it was like, I mean mean if you just read the high level summary you probably got a really good idea but i still went into each sections because what i want to do usually is actually validate some of the information because a lot of these short reports they'll interview like former employees and clearly that stuff is really impossible to validate where you have to take their reward for it. But when you can validate it with things that are actually found in financial statements that are official by the company or investor presentations, then that's when the short report, at least in my opinion, gains a lot of credibility. And if I think there's a, you know, there's merit to the short report, then I'll definitely read the whole thing when I

read after I've read the summary. And this was definitely the case given that I do own the stock. And most of the time, it's a big nothing burger. However, I think it is important to take the short report seriously because most of the time is not all of the time. And completely ignoring the short report without even acknowledging it is a big mistake, in my opinion, because when you start doing this, I think you're clearly showing as an investor that you'll only acknowledge viewpoints that align with your own investment thesis. So you're only looking for confirmation by like, you have a confirmation bias, essentially something that will confirm your thesis. And if I do find that there are legitimate concern raised by the short report, I mean, I am prepared to trim or sell my position depending on what the situation is.

So anything you wanted to add there before I kind of start going over what Indenburg Research is and then the short report i think generally positions you own you should be able to come up with a few sides to counteract your your optimism a few like what the bears would say type points it's the old charlie munger quote you should to win an argument you should be able to argue their point better than them that is a very classic charlie munger quote, to win an argument, you should be able to argue their point better than them. That is a very classic Charlie Mungerism. And I think that that's exactly right. And then when these short reports come out, usually they're going to talk about the main kind of drawbacks, the main issues with the company moving forward. And I think that they've highlighted those structurally beyond the accounting issues we're going to talk about. So we'll get into all that. But none of them should come to a surprise. Nothing in the tech area that I'm going to talk

a lot about is a surprise. It's actually the reason I stopped adding to the position and it never really took off. It never became a core position because this is the real structural issue with the technology landscape. So to add on to what you're saying, you can learn a lot from a short report, but the core kind of points against the business, they shouldn't come as a huge surprise. And if they do, then you probably didn't understand the counter argument to the downside of the business well enough. understand the counter argument to the downside of the business well enough. Yeah. And I would say for me, I agree with that with the exception of the accounting issues that I mean, I knew that their metrics looked way better than some of their competitors, but I didn't obviously I didn't go as far back as Indian Burke Research did. They went as far back as 2013, 2014 to show the discrepancies there. And then when I started reviewing their numbers with some more recent financial statement, comparing it to peers, which I'll go over, started to make a whole lot more sense. So that is something that was a bit of a surprise for me, but the rest in terms of the-

I'd say with the exception of accounting and the exception of fraud. Yeah, yeah, exactly. Generally, it shouldn't be a huge surprise. No, that's it. And so let's start with Hindenburg Research because not all short-selling firms are the same. And before I kind of talked about them, short-selling, I mean, they're a research firm,

but they were made very kind of famous with their takes on or their short selling report. And for those who are new to the podcast, short selling is just meaning that you're betting against the business. So you're betting that the stock price will actually go down and you'll make money by doing so. I won't go into the intricacies of how it works. We've talked about that before. So feel free to revisit some older episodes for that. But essentially, you're betting against the business. That's what you're doing when you're shorting a business. And if you've been investing for a while, you're probably

familiar with Hindenburg Research. If you haven't, here is the TLDR. So they are a well-known firm. They are known for investigative reports and have had quite a good track record. Their research is extensive and extremely thorough. An example of some success stories, if you'd like, that they've had, and there are quite a few of them, but this is just a few examples. So when Twitter, when Musk offered to buy Twitter, they actually shorted the stock. So one of the reasons they did it was because he was a notoriously impulsive individual I think we can all agree with that that's that's not a bad take here and they bet that he would either try to walk away or renegotiate the deal which ended up

which he ended up trying to do that sent the stock lower and they covered their position afterwards so they made that just means they made the money in short they later went long so they bet let's just say they did the opposite so they actually bet that the stock price would increase because they believe that the courts would actually uphold the deal and this is what ended up happening so they essentially made like money on both sides of the trade here so they shorted it at the right time and then when they made their money there they're like you know what now we actually think that the deal will go through and we're going along the stock just because we think it's actually going to the deal's gonna get done and i mean they were right on both sides and the other example that comes to mind and one that I know you were pretty vocal about is Nikola, which ended up being a fraud.

So the car, the EV truck company, complete fraud. And I think the seal was even charged for fraud, right? Trevor Milton, was it? Yeah, I think you're right. Yeah. Yeah. was it? Yeah, I think you're right. Yeah. And there's also the Indian conglomerate Adani, which has definitely recovered, but had a sharp draw after the short report that was released by Hindenburg Research. But those are just some example. Can I take credit? I was

psychologically short Adani before Hindenburg was. So I don't know. I'll chalk that up as a W. Sounds good. I didn't make any money from it, but I get to brag on the podcast. No, exactly. And now, what's Equinix? So for those who are not familiar, the ticker is EQIX. So Equinix is the largest data center REIT in the world. It has over 260 facilities worldwide. Equinix is a REIT, meaning that it's a real estate investment trust. It's just a structure that is very specific to real estate. It has a market cap of approximately $75 billion, which is down from the $80 billion when the short report was released and the stock has

been doing quite well in recent years especially benefiting from all the ai hype so what did the short reports say well there's three main things and we will go into detail with you know each of those concerns raised by the short report there's actually four parts but I found that there was like two in one so I kind of put them together the first one is the accounting issues so Equinix manipulates a FFO a key profitability metric for REITs and I will explain what a FFO is number two they are over selling power and number three Equinix is being disrupted by large cloud providers such as Microsoft, Google, Amazon, also known as hyperscalers. Anything you want to add before I get started on the fun accounting stuff?

No, I think that that's right. You'll cover the first two. I'll chime in on the second one. You'll talk about the accounting issues. For me, the third one is the most of substance in terms of issues with the actual business. And I've talked to a friend about this. I'm like, okay, if they're right about the accounting and they're right about the power, sure. But if they're right on the right side of the trade, it's because they were actually right about the disruption from

cloud. Yeah. No, I would agree with that. And for me, the accounting where maybe the number one and two points where I have an issue is it erodes my trust in management. And I think that is a big, big thing. If I have a company where I can't trust what management is saying, then what the hell am I doing owning that company? So that's kind of how I see things. And then you add on to the fact that the potential disruptions as well for hyperscalers. Now,

if you're new to REITs, that's okay. Like I mentioned, I'll do a quick explanation of what it is. So net income or net profits are not great profitability metrics for REITs, a real estate investment trust. So get used to that term, I'll be saying it a lot, because they don't provide a good picture of the recurring cash flow that's generated by these businesses. That's because net income includes depreciation and amortization, which are non-cash items. Free cash flow also has its limitation because it lumps in all capital expenditures together and doesn't separate between what's called maintenance capital expenditures so what's used to just maintain

your current assets and make sure they function properly and growth capital expenditures which are used to grow the business and essentially you know grow the business cash flow. AFFO, so Adjusted Funds from Operation, is supposed to take care of this. So you take net income and you remove the impacts of depreciation and amortization since they are non-cash items. You then factor in maintenance capital expenditure, which is called maintenance capex, to have a better picture of the actual cash generated by the REIT. So there's a couple of other items that they adjust for, but that's a general sense of it. And one, AFFO is a really useful metric, but one of the issues that's being highlighted here,

and one of the issues using this metric is it's a non-gap metric. So it's a non-standardized metric. It is very useful for reads, but the problem is, is that it's not always used as consistently or calculated the same way from read A to read B. And this is one of the things that Hindenburg research is alleging. Anything you want to add there before I keep going?

So essentially to read reiterate for the listeners, they are overstating, they believe they are overstating adjusted funds from operation. That's right. Adjusted funds from operation. Yeah, that's correct. So that's in short what they're saying. So essentially, Internberg Research is saying that in 2015, when Equinix converted to a REIT structure, because they were not before that, they had a significant drop in maintenance capex as a percentage of the revenue. So you just take the maintenance capex and you divide it by the percentage of revenue. maintenance capex and you divide it by the percentage of revenue. In their report, they mentioned that it went from being in the 8% to 9% range in 2013 and 2014 and then went to slightly

above 4% in 2015. So a drop by half. I wasn't able to verify that specific thing from the 2013 and 2014 numbers because Equinix wasn't reporting in the same way. And when I looked at the 2015 numbers, they were using the comms from previous year with the AFFO, but I think they just calculated it the same way. So that part I wasn't able to verify. However, I was able to verify that maintenance capex is now down to 2.66% for Equinix as a percentage of its revenues compared to 6% for Digital Realty, which is their main pure play competitor. There are other competitors like American Tower REIT, but American Tower REIT also has these like cell phone towers.

So it's not the best comparator in my opinion. But the fact that it's more than half the maintenance capex of their main competitor is definitely a big red flag for me. If it were like four and a half, 4%, I think you can definitely make the case that, you know, they're just better managed. I think that makes a lot of sense. But to have such a discrepancy is definitely a red flag. And the fact that it has steadily gone down as well, despite inflation being significantly higher in the last few years, I just find that hard to believe. It's literally gone from more than 4% in 2015 to 2.66%. And if it was still around the 4% mark, like I said, maybe I think it'd be easier to give them

the benefit of the doubt when comparing to Digital Realty Trust. But I don't know, to me, that screams too good to be true. And they said that Equinix categorizes tons of maintenance expenses as growth capex to make their numbers look better. Former employees even mentioned, and obviously we can't verify this, but that things like new light bulbs were classified as growth capex. So yeah, I mean, if that's true, then that's borderline.

I mean, I don't know if you'd call that fraud, but it's pretty close to it. Just kind of- It's a non-gap number, right? Exactly. That's the problem. That there's no... So maybe we should back up a little bit and explain this. So non-GAAP number just means that it's outside of the generally accepted accounting principles, and it's not a standardized metric. And then a lot of these companies will use adjusted on non-gap numbers, which is now like adjusted, adjusted. It's basically like you grab a bunch

of spinach, okay? And you put it in the pan and that's the adjusted number. After the pan cooks the spinach for 10 minutes and it shrinks to a tiny little bit, that might be the true gap number. And so that's like an easy analogy to think about. There's ways to manipulate it, but there's ways to manipulate it without any sort of criticism or any regulation because everyone knows, hey, you can't criticize my number because we all know it's made up anyways. That's kind of one of the structural problems with these numbers. Yeah. Maybe I'll take that back. It's not fraud, but definitely misleading investors. I think that is at the very least what they're saying. And also just to add to what you're saying,

GAAP. So GAAP is for American businesses. So it's for U.S. businesses. So rest of the world, typically it will be IFRS. So International Financial Reporting Standards, I think, is the full term. So if you ever see non-IFRS or non-GAP, these are non kind of more accepted or what's typically accepted by regulators. But again, it's not to say that AFFO is not useful for a REIT. It is useful, but it has to, you have to make sure they calculate it properly. And it's not always easy to figure out whether they do or not. And I think that's

what they're showing here. And the other way they are boosting AFFO is by allocating operating expenses to CapEx and not the maintenance CapEx that I just talked about. The reason they say Equinix is doing this is because a big part of their executive compensation is tied to FFO and revenues. And there is clearly the incentive for them to do that, to boost the FFO. They actually reduce those maintenance CapEx. The numbers look better,

they hit their targets, they get paid. And the last part is definitely true in terms of their incentives. I looked at their proxy statement, it is all tied to AFFO and revenues. So there is clearly incentive from executives here to make those numbers look better. This is the part that actually feels like the smoking gun in the report. It's just like, okay, sure, there's this made-up number, and we made made-up adjustments to this made-up number, but your comp package being tied to it, that's where when there's smoke, there's fire, right? That's when there's actual incentive to act a certain way. If it wasn't that way, then everyone would be like, okay,

who cares? It's a made up number anyways. But when there is actual compensation structures tied to the management and that's how they're judged on management performance, show me the incentive and I'll show you the outcome. Yeah, no, exactly. So that's kind of an overview here of what they're alleging in terms of the accounting shenanigans or misleading, whatever you want to call it. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees.

They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly.

Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm gonna spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away.

Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at Airbnb.ca forward slash host. That is Airbnb.ca forward slash host. Now, number two, they are overselling power.

So they're alleging that they're overselling power capacity in the hopes that customers will not use at all. And essentially, they're saying they're misleading investor by saying that cabinet space use is 79% across all regions, when in reality, there are severe power constraint, which are different than cabinet space, because these are not the same thing. So you know, cabinet space that is available is completely different than cabinet space, because these are not the same thing. So, you know, cabinet space that is available is completely different than the power available to power whichever computer or server that's within those cabinet. But they're not disclosing the power to utilization across their data center, which, of course, that is cause for concern. which, of course, that is cause for concern. And if customers start using the power they've contracted, Equinix could be at serious risk of an outage,

which would be a massive problem for its reputation and business. Obviously, if customers with Equinix and power goes out, it affects their business. And I can guarantee there would be some very unhappy customers. And I can guarantee there would be some very unhappy customers. And there's really what they're also saying is there's some real risk here, especially as AI puts a lot of demand on energy. I mean, we've seen it with NVIDIA and the buildup of hyperscalers. Like it's literally like it's these are power hungry machines. So it could create a big problem in terms of Equinix and the potential for outages going forward. It hasn't happened yet, but they're saying it's a real risk. And they've talked to executives as well, former executives that say, essentially, they've been doing this for years,

I've been able to get away with it. But again, going forward, who knows what will happen from that standpoint. But it also shows that there's less potential for growth if this is in fact true. Yeah. With the power situation, I don't know all the inner workings of how networking actually works. And I suspect with the infrastructure and the hardware coming into these racks now are a lot more power hungry especially because of how these gpus perform so i think that that's i think that that's all probably fair i just don't think that it's not fixable like unless these data centers on the end of lines and they're actually gonna need to build like code generation on top of it and

there's gonna be some lag lead time like this is is fixable. So this is one where it's like, okay, there might be some short-term issues if they're overselling power and they're going to have a huge gap of what's actually required for their customers. I look at that as maybe a short-term concern. Yeah. I mean, and also they're relying a lot on interviews they've done with former employees. So this is not as verifiable. And I think one of the big things they're alleging is they're misleading investors with the potential growth. Or if like you're saying there is some potential for more power to be delivered there, well, how much does that actually increase the cost for equinix impact profitability

so there are some ripple effects but this was probably the weakest point of the short report in my opinion just because it's it's harder to verify i mean i'm not saying it's wrong or correct but to me that the two kind of smoking gun was the accounting issues, if you like, that they're raising, but also the potential disruption from the hyperscalers that you'll be talking about just now. Yeah. So I guess we can talk about that. Now, accounting, sure. Okay. The second point, sure. Okay. I looked through them and that's not really a concern for me in terms of like, I need to sell the stock right, right now. I think that adjusted, adjusted, adjusted funds from operations. Whoa, shocking that there's been some fudging. I don't think really anyone's super shocked as soon as

you have an adjusted, adjusted number. However, as an investor, I care about the long-term prospects of this business. So to give people a little bit more context about Equinix is they sell space, power, and heat and interconnectivity. And I'm going to talk about what that means. So they operate today, 260 data centers all around the world. And that can give a lot of these large enterprises data space racks on servers all around the world and the ability to interconnect to their customers physically with fiber wires right on-prem all around the world with a huge footprint with 260 data centers in every continent, right? And so that's a really appealing thing for large enterprises. And it's been an extremely appealing proposition for Equinix for the last 20 years. It's been an incredibly good stock. It's been a

really good business. And even as cloud came on and people are going off-prem, so instead of owning all that server space on their own managed data centers, what they'll do is they'll co-locate in a third-party place, in this case, a real estate company like Equinix that will sell you rack space. Now, the big benefit of that, the real crown jewel of my Equinix thesis, when I bought it two, three-ish years ago, when interconnection growth was still 15% quarter over quarter, the gravy chain was rolling. Something's changed. And I'm going to explain what that is. The crown jewel of this business has been interconnection because that is true network effects. So Simone, it's a lot more appealing to house my equipment and my networking equipment with an Equinix over a competitor,

because they're the largest and because I'm going to easily be able to interconnect with my partners, my vendors, my customers in a B2B relationship type way with literal wiring to and from our servers and their servers on the location that Equinix offers. That's amazing. It gives me exactly what I need and secure data transfer between those companies. That's what's been the crown jewel of Equinix and created a real network effect. Equinix is like the longest, I think it's 80 straight quarters, 82 straight quarters of revenue growth. It's the longest streak of revenue growth of any single S&P 500 company. So this has been a growth business. What Hindenburg is pointing at is something that I pointed at basically three quarters after owning the stock is cloud providers,

is cloud providers, the hyperscalers like Amazon, Google, and Microsoft are allowing direct interconnection over the cloud and on their locations because those hyperscalers have their own data centers that they own and manage and operate. There's huge CapEx items on these big tech companies. You can bypass the need for co-location and interconnection. Co-location just means, well, you have a company, I have a company, we're both going to co-locate in an Equinix third-party data center. Now I can bypass that over the cloud with direct connects.

AWS calls it SiteLink. I forget what the other ones call it, but this is very common. Yeah. I think it launched in 2021, I think for AWS. That's right. And Equinix has tried to counter that with two products called Fabric and ScaleX. Yeah. They haven't had a whole lot of traction because, I mean, why would you when you can do it cheaper and faster with one of the big techs? And a lot cheaper too. Not to mention any startup can get like $300,000 worth of credits, like cloud credits right out of the gate with these, because they're trying to win business from each other as well. So there's commoditization in pricing. So that's one thing happening. The other issue is cloud native W-A-N-S,

which means content delivery networks like Cloudflare. They mentioned a couple other competitors. I don't know any of the other ones. We use Cloudflare. It's epic. Cloudflare is epic. epic it's so good and it's so cheap like it's unbelievable like they just absolute they're just grabbing market share left right and center so there's becoming less and less of a need for large enterprises companies building hybrid clouds, companies, mega companies, like even exchanges to use third parties like Equinix and startups like us who will be the companies of tomorrow can bypass that with hyperscalers, Google, Amazon, Microsoft, and then the use

of these content delivery networks like Cloudflare. So this is the serious concern because the crown jewel of interconnection is being bypassed and hyperscalers are paying nothing for cross-connects between these. So interconnections, which we track on FinChat, you can go on Equinix, you go on the KPIs. Equinix was growing interconnections at like double digits, and then it dropped down to high single digits. The last four quarters have been 5.6%, 4.7%, 3.9%, and 3.4%. So it is declining steady to low single digit growth on interconnections. So net of churn, this business is not what it used to be. And the reason that I bought the stock was because there's an actual network effect in networking. that's not meant to be a pun. There's an actual network effect in the cross connects

and networking and interconnection. There was an advantage to co-location. Tech is changing. Tech changes fast, man. Especially at this huge infrastructure level when you're playing with the big dogs. And so what used to be looked at as a boom with AI and everyone moving to the cloud, that was a boom. And now it's being bypassed in the last like

three, four years. And that's a concern for, I guess, the next 10 years of Equinix. I bought this stock because of interconnection growth. And it's basically trending to zero on that top line. So that's the major concern. To counteract that, Simone, this company is still growing. There's still a need for what they do. There's still a great product market fit for what they do, but a large part of their business is going to not be needed and bypassed. And that's a concern. To counteract that discussion, I mean, they have basically 2 billion here in ARR every single quarter. So like 6.5 billion in ARR. No, like 8 billion-ish in run rate next year. It's still a solid business. It's still growing really fast. The valuation is getting a little bit more enticing,

but you have to counteract that with, is the business getting structurally worse? And I think the answer to that is yes. Yeah, and I think you broke it down well. I mean, for me, it's funny. Maybe it shows what we kind of focus on a bit more. For me, it's the accounting red flags and then added what you just said in terms of where the business is going. added what you just said in terms of where the business is going. And the reason why I get back to the accounting is REITs are usually REITs trade as a multiple of FFO, funds from operation or AFFO. And one thing that this short report has showed me, and of course, it's adjusted metrics,

and I know all of that, but I'll still come back to the discrepancy between their AFFO and DLR's AFFO. And that's where it really, for me, that's where the red flags are, especially when then you factor in how management or how executives are compensated. It really raises a lot of question, and I do think there's a big risk for the business to see the multiples that are trading on go significantly lower. I don't think it's a zero by any stretch of the imagination. They're not saying that it's a zero in the short report either. They're just saying that it's overvalued for the most part because of the reasons we just

outlined in future growth, overselling power and the accounting issues. So me, when I take all of these together, and especially the accounting issues, because I was able to verify a whole lot what they're saying with my own eyes going into the financial report, that's where it has me definitely a concern about at the very least evaluation right now and that it could be ripe for a significant significant pullback i think it's the most highly valued player that's for sure in the space yeah yeah because network effect really matter in this business co-location inter-action really really matter and the market rewarded that. Bigger is better when it comes to these infrastructure companies. There's just no doubt of that. And if growth

starts to really slow down, the writing's kind of on the wall here in the last six quarters, that that is clearly happening. It's easy to look at the revenue and the top line and FFO, just funds from operations and go, yeah, it's still up into the right, which it is. It is. This is why I focus on the metrics that I actually care about. Like I bought the stock for interconnection growth. Companies like, you know, crossing wires literally between I run a company, you and a company, we're going to connect to have a secure data transfer. I'm a telco, you're a whatever. That's stalling out big time. And so what they're saying is clearly happening in the document,

in the data. So that's where I get a little concerned. All right. So to wrap this up, what are you doing? You are, were wrap this up, what are you doing? You are, were a shareholder? What are you doing? I sold it all. Oh, damn. Yeah. I mean, look, I don't know where the stock will go forward. It could very well go higher, especially if there continues to be a lot of hype around AI. But I said it, I think I alluded it early on when I was talking about the accounting section. It just, um, I said it, I think I alluded it early on when I was talking about the accounting section. It just, unfortunately it just erodes my trust into the executives and I can't hold the business where I don't trust what they're saying. And there's enough red flags to, you know,

maybe they're doing things correctly, but when I look at the numbers, there's just something that doesn't make sense. And, you know, obviously they did some interviews and that I can't validate. But just based on the numbers, that's what really I find really concerning. And then when I looked at the kind of future of the business and the interconnection, and yes, they had like a really good product. If you went back a few years before, you know, all the big cloud providers started coming out with some solution, you know, to compete against that. When you add everything in,

I just don't, I don't have the conviction to hold them, hold Dequinix going forward. I'm just looking, analysts are guiding for pretty steady, like it looks like they just typed in nine percent growth on the top line in their excel spreadsheet and called it a day that's what almost every analyst model looks like on finch yeah uh consensus because that's what the company usually guides for

nine to fifteen percent i think their latest one they said they're gonna do nine they'll probably do nine just based on pricing power and a little bit of growth that they do see organically, plus new data center openings. But new data center openings are going down and our connections are going down. These are things I noticed right after I bought the stock. So I bought the stock. It is now my lowest position by far because I never, ever bought a single share. Instead, I bought all the hyperscalers. during that time period for me. So it was definitely a good investment. And I guess the last thing I want to finish on,

and I don't know about you, I'm a bit passionate for this, but it pisses me off when I hear like CEOs and Elon Musk has been vocal about that, like trash talking short sellers. Yeah, clearly stupid. I think it's so stupid. But again, I think there are some really shady- Have you seen the palantir

one oh yeah yeah like what what did he say they're they're trying to like use like the money to go buy coke or something yeah he's like weird like he he yeah okay first of all and alex carp is this guy this guy creeps me out he goes and it's not cocaBC, he's like, what's that? And I'm like, it's not Coca-Cola. Like I literally said that on the interview. Yeah. He's like these cocaine addicts, like he's on CNBC, they're shorting stocks just so they can make their money to buy their Coke. And he's on CNBC and he's just an absolute lunatic, this guy. Dude, red flag, not the Coke thing, just how angry and against short sellers you are. Nothing screams you have something to hide like being scared of short sellers. I can't think of a bigger red flag than CEOs hating on, being scared of, calling out short sellers. Ding, ding, ding, red flag. It's like, what do you have to hide?

One. Two, why do you care? Three, short sellers make a very healthy part of the market, especially a Hindenburg that calls out BS. This one, they're not calling out fraud. They're basically saying, look, the business is overvalued. I think that they're going to have a rough couple years. But they've had a pretty good track record of calling out just blatant frauds, which I appreciate. I like Hindenburg Research. I think they do a good job. calling out trash because there's a lot of trash out there. And if these guys want to make money by calling out the trash and putting their money where their mouth is, good for them. In my view, a very healthy part of the market. I know Palantir has a very passionate shareholder group, but if your CEO is very anti-short sellers, you have to ask yourself, what is the man hiding? short sellers, you have to ask yourself, what is the man hiding? Yeah. Yeah. And I mean, look, there are some shady characters in short selling. That's for sure. Like, I'm not gonna, you know,

say that that's not true. But there are some reputable firms or reputable people that do really good work and identify frauds, identify. I mean, in this case, I wouldn't say it's fraud, but I think it's more like, you know, issues with the business, I would say. I mean, in this case, I wouldn't say it's fraud, but I think it's more like, you know, issues with the business, I would say. I think some significant issues with the business. They're saying issues that are overlooked by the multiple. Exactly. And I think that's a great thing. Obviously, as a shareholder, honestly, I'm happy that they, well, a former shareholder, that they raised those issues. And sometimes, I mean, it's going to be overblown. It's not going to be really that useful.

But I think it's a good counterbalance because you know as well as I do, and you don't need to look very far. You can just look at the TSX Venture. I mean, there are some publicly listed companies. There are some publicly listed companies, I have some big issues with that. Is our boy FaceDrive still? Well, that's FaceDrive or Steer now. Steer, oh. Yeah, so you can go back.

I think it was what in, what was it in early 2021, 2021 i think that we really did a bit of a deep dive so i use phase drive as a parameter for how overbought or how uh let's just say um the hype in the market in general yeah it's a pretty good bell uh it's a pretty good proxy for junk in the market. And people willing to throw money at stuff that literally there's no business behind this thing. Oh, God, what a piece of shit this stock is. Yeah, you know what? The people who call this out and make it their life mission to protect investors against fraud, they should get compensated, especially if they're willing to put their money where their mouth is with this stuff.

And they're right. They should get compensated. That is what makes the market a market. There's two sides of every trade. And there is people who should be compensated for being right, correct, over and over again. And so I thought this was an interesting conversation because you were a shareholder. I am a shareholder. If I do something and exit the position, it's not because of this short report. I've been very vocal about my view on the hyperscaler market. It would be because I don't plan on adding to it with fresh capital and it will become such a small part of my portfolio that it's like, I just cut things that are less than half a percent. Anything that's less than half a percent,

they're not a core position and they're no longer a workbench position either. I just cut them because there's not enough focus. Yeah, that's fair. I mean, for me, I think the downside risk is higher than the upside for Equinix, and it was a big enough position that that's essentially, ultimately, that's the calculus I made after reading the short report, doing my own research, validating the information, and then I took the decision to do that. The last thing I'll add here is for people who want to see how short sellers like almost zero revenue that were trading for billions of dollars in the early 2010s because. On US exchanges. On US exchanges because people were kind of, I guess, snake bit by the, you know, the great financial crisis. No one was doing the on the ground, boots on the ground research until these guys showed up

at the place of residence that they say their business is. Yeah. And found that it's- Hiding and filming at the same time. Yeah. Yeah. So that's a good example. Dangerous business that is actually.

Yeah. And at the time, I mean, I think it was just a hype of, you know, the China story, right? The Chinese growth and making money on China and so on. So I would definitely encourage people. I know Dirty Money has a couple of short selling example episodes in there. I think Valiant Pharmaceutical was one of the big ones. That girl that shorted them, she was really smart.

I think she has another short going on right now. I can't remember her name. But I think it short going on right now i can't remember her name but i think it was like yeah i can't remember her name but you know which one i'm talking about right yeah the dirty money ones are good those are solid the what is it the one with uh ackman he does herbal life yeah yeah yeah he's That didn't go too well though. But he was right. He was right. Just the timing is wrong. This is another risk that short sellers take on that doesn't get enough credit too. They can be right for a long time and get waxed

like Bill Ackman did with Herbalife, calling that junk out. Yeah, because we didn't go into the details of short selling, but essentially one of the things is you borrow shares. So you actually have to like, there's a carry cost to the having the trade on. So you can't hold them forever. And then if the share price keeps going up, then your losses mount and mount and mount. And at some point you have to cover your short position if you don't want to go bankrupt or risk going bankrupt. So that's essentially the risk behind short selling.

Thanks for listening to the podcast, folks. We really appreciate you. We are here Mondays and Thursdays. The show goes on. You can see our faces for radio recording on the podcast here at join tci.com. It's $9 Canadian a month. Not only do you get that, but you get our monthly portfolio updates, which this will come out with a brand new fresh one. You can see, I mean, you're going to have some shakeups in your portfolio. I think there's a pretty large position that you have this month. So there you go. large position that you did this month so yeah uh so there you go and uh you get myself you get dan you get simone in a in a little spreadsheet i know got a couple hundred people following along

at this point right simone yeah yeah definitely yeah cool yeah it's a good deal and we post the videos obviously yeah yeah faces faces for radio that's right you get my like double chin angle here because i had this beautiful setup with my camera i connect i bought this thing that connects my phone it's like 1080p recording it worked so great for like four recordings and i haven't got it to work since i didn't do anything i. I didn't change anything. Oh, man. I'll trade you my single chin for your hair. Done. Done deal.

Trade. Complete. There's a winner and a loser in every trade. I don't know which one I'm winning, limiting or losing there. Thanks for listening. We'll see you in a few days. Take care. Bye-bye.

The Canadian Investor Podcast should not be construed as investment or losing there. Thanks for listening. We'll see you in a few days. Take care. Bye-bye.