The Canadian Investor - The Perfect Dividend Stock

Episode Date: June 6, 2022

In this release of the Canadian Investor Podcast, we cover the following topics: Recent returns from Canadian Equities A deep dive into Equinix, the Data REIT market leader Tickers of stocks discussed: EQIX Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense. Check out the Yes We are Open Podcast from sponsor MonerisSee 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. Live from the great white north, 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. Today is June 2nd.

I am Brayden Dennis, as always joined by Simon Belanger. I think we have a heck of an episode for you guys today. Simone, I was telling you, I was texting you when I saw your notes that what you want to talk about. I was like, we need to launch that to the first topic of the day because I've been thinking about this so much. I love the topic. So we'll get you to do that. And then I'm going to do a deep dive into Equinix, which by the way, it's quite long. And I want you to just contribute along the way, because I know that there's two people here. One of us owns shares and it's not me. Yeah, that is correct.

So I want you to chime in wherever possible as well. But let's start off here with your first segment here. But before we do that, we just started another document for our notes. We're now on to the third one. So I want you, I want everyone just to recognize the effort put in to these episodes because we're like at like a thousand pages of notes if you add it all together. And so we just want really good content for you guys. And so we love doing it. And so we'll keep doing it. But Simon, I love this segment. Let's hear it. Yeah. Yeah. And just to add before we get started here, we definitely take a lot of notes. We obviously want to be prepared, have some good content. And the way we do it is usually I'll

be the first one to do the notes just because the way our schedules work. So I'll do the notes usually on the weekends or Mondays, and then Brayden will do the notes a bit later in the week. That's the nice way of you saying absolutely last minute, which is basically how it goes. We have different schedules, so I think it comes down to that. So the first segment I titled it that are Canadian stocks doing well, or is it recency bias? So we've talked more than once about Canadian home bias on this podcast. And to be fair to our Canadian listeners, I think it's pretty common, whichever country you live in, people tend to invest in companies that they know in, you know, the stock market, that's the closest to them. I know I've

read similar data for Australia. Clearly in the US, I think for them it's a bit different because they have such a wide range. And I would venture to say that it's probably the same in Europe as well. So I wanted to have a look here how someone would have fared with that Canadian home bias. fared with that Canadian home bias. Now I'll just be comparing the main index here so the S&P 500 and the TSX and I went down from 10 years all the way to very recently. So in the last 10 years the S&P 500 is up 205% and the S&P TSX 78%. Five years S&P 500 61%, TSX 31%. Three years while S&P 500 61%, TSX 31%. Three years, S&P 500 51%, TSX 30%. Two years, now it's starting to shift a little bit. So the S&P 500 36% and the TSX 38%.

That one actually surprised me. I thought the S&P 500 would still be a bit in front. One year, this one, not surprising at all. S&P 500 down 1.7%, TSX up 5.4%. And then year to date, the TSX has completely crushed the S&P 500. S&P 500 is down 13.3%, and the TSX is only down 1.4%. is down 13.3% and the TSX is only down 1.4%. So clearly we see a trend here long term. The S&P 500 has outperformed, but recently it's been the other way around. Although these are numbers that do not include dividends, so the TSX is actually performing a little better when you factor in the dividends. I think typically, and I don't know, I'm just going just here on feel, but I think that TSX usually yields about probably 1% more than the S&P 500

on average ballpark. Yeah. When you look at the index constituents of banks and energy. Exactly. It makes a lot of sense. That's it, because it's so heavily weighted for that. And clearly what you just said, I think in a nutshell explains why it has performed so well recently, because those are the companies that have performed well recently. So does this mean that you should weigh your investment more heavily towards Canadian stocks? I would be really careful doing that. It's really easy to say, well, Canadian economy is full of energy and commodity companies, which should thrive during high inflation. So I just should just switch my portfolio to that. Well, the issue with that is that macro is very difficult to predict and commodities

are extremely hard to predict as well. Recently, I mean, we've seen the central banks actually do an about face on their projections for the economy. The Bank of Canada just recently said that inflation is actually much higher than they had forecasted even just a few months ago, right? So it's very like when... Oh, really? Yeah, that's it. But you... I'm shocked. You have these, you know, what are supposed to be the best people to do these predictions missing them. Right. So I think it's important to remember that. And I remember we even talked about it when we did the CPI. I think it was like December, January. And StatsCan was saying they were projecting that it would actually slow down in the spring and it's actually picked up. So take it when it comes to predictions for macro with a grain of salt, because I think it can really go one way or the other.

But coming back to what we're talking about, recency bias is something that I think is very easy to fall into, not only for investing, but I think a lot of times in our everyday life, our minds have a tendency to think that what just happened will keep on happening. Just remember last summer, right? People were buying growth stocks at crazy multiples. Now, some of those same people don't want to touch these companies with a 10-foot pole,

even if they are down more than 80% or 90% in price. And some of the companies are actually still doing quite well. Some, I would say it's probably warranted because they're not generating any cash flow and the premise has changed a little bit or a lot in some cases. And obviously I'm oversimplifying things a bit here, but I think you get the point. People think that they will keep falling because they have been falling recently, so they don't want to get into these growth companies. But recency bias, it's really powerful, really easy to get into. I think it's a very emotional response

as well. And once you take some time to actually think it through, you'll realize that things are not always as they look from recent memory. Right. So, recency bias is quite the drug. I mean, I can think of so many examples where you look like a genius and then you look like an idiot within like a few months change, right? And there's so many examples of this where you'll say, oh, I own stock X, okay? And people are like, ooh, really? Oh, that thing's down like 30%. Oh. They think one of two things, what a terrible stock pick or two, what a terrible investor. And then you zoom out and the thing's up like 10 times in price in 10 years. And there's so many examples of this. Everywhere you look with all these secular compounders over the past 10 plus years of performance that have done really well and have been excellent businesses and result excellent

stocks. If you zoom out, you're like, okay, I've made a ton of money. Even when we were just talking, I think in yesterday's recording, we're like, okay, the NASDAQ's on legit bear market territory, down 25% year to date, or at least from the peak, maybe in November of last year, whatever it is, it's in a bear market. And then you look and it's up 80% since March of 2020, right? Like if you take that timeframe and 80% return and you're thrilled, but in the short term, everyone's caught up in their emotions and everyone's caught up in recency bias. And don't think that it's just retail or unprofessional investors doing this. It's not. It's pros doing this too. People are really, really good, which is the result is

really, really bad of doing the right things at the wrong time. The right time to get long commodities was two years ago. Not now. When everyone tells you you're smart for buying commodities, it's not when you buy commodities. You got to zig when they zag, right? This is 101 in terms of contrarian investing. You don't have to be some super mega contrarian to do well, but you have to at least be able to think for yourself. Yeah. And speaking of commodities, so if you take what you just said, but you take a company like even a Suncor, for example, and you look recently, it's done really well, right? Over the past year or so, done quite well. But then if you look at the whole chart here, you'll see that if you invested

in Suncor in 2008, you're probably slightly up on your investment if you factor in dividends, but you definitely have not outperformed the market. I can tell you that for sure. But it's easy to just take that timeframe that was recent. And I think that's probably why a lot of people instinctively will end up investing in the stock market and end up buying high and selling low. It's because they see that recently it's going well, they want to get into the stock market, they don't want to miss out. And then the companies just start crashing. And then they panic, they think that it will just start crashing and then they panic. They think that it will just keep crashing going forward and that recency bias kicks in, right? And then there's obviously loss aversion in there as well,

but I think it's a pretty good explanation in my opinion. There is a well-known fund manager out of Canada that I am not going to mention his name because I think he's a complete grift and I don't even want to give him the light of day. He charges almost, I think it's a 6.8% management fee. I'm not, I don't, this is not a joke. Yeah. And it is just investing in Canadian energy. Okay. Just Canadian energy. Now all his guru followers, because for some reason he has a cult that follows him online. I'm not sure. There's a lot of people who are oil, yeah, oil in terms of their investing strategy. And sure, that's fine. I mean, you've done exceptionally well recently. But this fund, for example, has basically generated no returns since its inception in the mid 2000s. No return.

since its inception in the mid-2000s. No return. And you've paid 6.5% for this bozo to manage it, okay? So you've lost money net-net in a major way after management fees. But the guy's up like 80% year-to-date, right? And all him and his clan are singing from the high heavens, saying how awesome their investing strategy is. And you zoom out and they have gotten absolutely slammed by the market and they've lost their investors' money net of fees. And so I love this segment because it touches on

a few things, recency bias, and it also touches on the fact that the reality is that the US market, the S&P 500, to bring it all full circle in your segment here, the S&P 500 is up 205% in the past 10 years, and the S&P TSX is 78%, more than double the performance. On a year-to-date basis, the performance on a year-to-date basis, it flips. But still, including that year-to-date performance, including it, you still get this huge disparity in performance between the two. And so, it's a reminder of three things. It's a reminder of recency bias. It's a reminder of the US market versus the Canadian market and the opportunities. And three is, I guess, connected to two, but you can't be Canadian home bias with your portfolio moving forward. I think that you'll face similar return disparity moving forward if you're not investing in some

great companies. And most of them are in the US. Don't get me wrong. There's a lot of great companies in Canada. I own a bunch of them. I own a ton of them, but I'm not excluding myself to that list. And I think that that's the important piece. Yeah. And it's fine to have some oil exposure too that's in Canada. And I don't think that's not what you're saying, right? If people want to have some exposure. And I know we have listeners that have done quite well because they started positioning some Canadian oil plays in 2020. And obviously, that was the perfect time to do it because everyone was extremely pessimistic on oil stocks because obviously, demand crashed worldwide because of COVID,

lockdowns and all that, travel being down. But again, you have to really be careful to be overly weighted into Canadian stocks. And the last thing I'll say here before we move on to Equinix is that a lot of investing is not necessarily the way you analyze companies. Obviously, that's important. But to me, probably the biggest and most important part of investing is just psychology, is just having the right mindset and making the right moves when people are freaking out you're buying. And then when things get really expensive, you're actually taking a step back.

You're not necessarily selling, but you're also not at it. That's right. And thanks for mentioning that as well. Like, don't hear what we're not saying. We're not like, you know're not super against buying oil stocks. I mean, I wish I bought it in 2020. Honestly, I do wish I would have. It's just not our style. We invest in companies with pricing power. And that's just what we do. Yeah. So don't hear what I'm not saying. I was just obviously in Alberta, and I've seen how much

it impacts the local economy when things are good here in Canada for commodity prices. And it's not like we're going off oil anytime soon. So I'm happy to see that work really well in those regions. I was born in Calgary. Half my family lives in Alberta. I get it. I totally, totally get it. I just like to invest in businesses with pricing power and I think that they typically are higher quality. No, I'd move to Canmore if I could. I would love living there. Canmore is great. Pretty close to Calgary, still in the mountains. Oh, yeah. That would be my dream place to live.

Beautiful place. Yeah. But maybe I'll retire there. Yeah. Hey, you know what? Maybe you will. 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. That is questtrade.com. on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo-style education lessons

that are completely free. You can search up Blossom Social in the App Store and join the community today. I'm on there. I encourage you, go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas, and using the analytics tools. So go ahead, Blossom Social in the App Store, and I'll see on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. Let's move on to Equinix here. So I wanted to do a deep dive on Equinix. And like I said, Simon, I want this to be a conversation. I have a ton of points here. I have like, it seems like a lot of notes, but there's a lot of figures and stuff too. So that takes up a lot of space. And again, a lot of this information is taken right from the report on

Stratosphere. So you can read it for yourself. If you type in EQIX on stratosphereinvesting.com, it'll pull it up. Okay. So let's start with some basics here. So this is Equinix. It is ticker EQIX. It is a US listed company. They are structured as a real estate investment trust and they manage data centers. I'm going to get into what a data center is, what the roots are and all that good stuff. And Simon, seriously, I encourage you to just join in the combo because like I said, there are two people here on this podcast. convo because like I said, there are two people here on this podcast. One of them owns this stock and it is not me. Okay. So perhaps immeasurable, but in my view, maybe in the circles I hang around with, Equinix is maybe the most overlooked, least understood, least talked about large caps.

I mean, the thing is 65 billion in market cap. And keep in mind, this is off a 22% drop in the stock from its peak in September. It was eyeing, I know it was at least 90 billion in market cap at some point. So we're talking about a gigantic global company. So Equinix is a digital infrastructure company. It was founded in Silicon Valley in 1998 company. It was founded in Silicon Valley in 1998 by Jay Adelson and Al Avery. Okay. Now, these two guys were facilities managers at a company called Digital Equipment Corporation. And it's not really that relevant, but I think it's interesting because I like focusing on and studying the entrepreneurs who start the business and everything else. So, this company was actually acquired by Compaq in 1998. Doesn't that just feel like 1998? Oh boy, Compaq. And then HP is like, we're going to swoop in and just buy Compaq.

Yeah. Oh God. HP, Compaq, 1998, all of it sounds very 1998-ish. Immediately, these two guys started working on Equinix together. And I watched an interview with Jay Adelson, the co-founder, in preparation of writing this segment up for you guys. And he described the internet as the Wild West. He said it was for cowboys and it wasn't set up for proper commercialization. And if you remember the internet back then, it was very simple, you know, very simple HTML page structures. And it's right. I mean, it was kind of for cowboys.

By cowboys, I mean like internet nerds. And it wasn't properly set up for commercialization, but they knew the opportunity of the internet. And he talked about that in the interview. He's like, there's a few people around me, including himself of the internet. And he talked about that in the interview. He's like, there's a few people around me, including himself at the time. And I'm paraphrasing, of course, but it's like, there's a few people who understood what it could be. And so he said that he knew someone would have to take on the challenge of actually building the infrastructure, right? Like, you know, the cables that go between continents and connectivity he understood that

someone had to take on this challenge and it's funny he quoted he goes i also didn't know how much money it was going to cost but but someone had to take on the challenge so in typical fashion simone you know an internet company at this time you go public at the hysteria of the dot com. So the company's only a few years old at this point, a couple years old at this point. And they went public in August of 2000. Okay. At 420 a share. Elon, be proud.

420 a share. And then it crashed, of course. Spoiler alert. Everyone knows this. It crashed. And when that thing crashed, you could see in the tech bubble who was wearing pants. The tide came in. Turns out hardly anyone was wearing pants.

Maybe no. It was a pantsless party. You know? You had even great companies like Microsoft just crashing. Yeah, you had great companies. What's the movie? Dude, the pantsless party, I'm looking this up. What's the movie where – it's not Borat.

Oh, it's Harold and Kumar. Is it Harold and Kumar? Yeah, it's the second one. Yeah, it is. Yeah, yeah. It is. It is. And he's like, hey, but they're all wearing shirts.

Yeah, yeah, that's it. He's like, oh, dude, put your shirt on. Like, what are you doing? Put your shirt on. But take your, dude, put your shirt on. Like, what are you doing? Put your shirt on. But take your pants off, put your shirt on. Okay, so now, as you mentioned, there were so many companies building important things, including, like you mentioned, some of the most important companies in the world today. Think of Microsoft.

But financial markets, you know, this is all tying well together. You get excited about the right things at the wrong time. We saw it with SaaS over the past 24 months. Now everyone hates it. I think quality SaaS actually looks pretty nice. The commodity stuff that's working now, the time to get long, it was when everyone hated it. That's classic financial markets. that's classic financial markets. Equinix was similar. The stock was $420 a share. It shot up a little bit in the height of the dot-com, and then it fell to $3. I think the lowest price it was actually $2.90 USD in 2003. Woof. That is like 99% of its value going to zero type vibes, right? And there's a classic theme here out of this era. I'm sure you can think of a couple examples here, right?

Yeah. Yeah. I mean, like obviously Microsoft was the one I thought about that comes top of my mind, obviously Nortel. If you're from Ottawa, that was another another one clearly that did not end very well especially for employees there's was that where their HQ was yeah yeah it was in Ottawa yeah I think now it's been I think it's like national defense that took over the building but yeah definitely it was in Ottawa a lot of people were close to retirement had to go back to work because I think they only recoup part of their pension through the bankruptcy hearings. Yeah, I see here their HQ was in Ottawa. I didn't know that.

Yeah, yeah. It was a big, big, big employer in Ottawa. Yeah. And it got hurt. A lot of people had a lot of Nortel stock too. So they'd be working for the company, had also their pension tied to them, tons of stock. You've seen that kind of story with GE as well. Unfortunately, people get way too invested. They get way too concentrated. Their salary is dependent on the company.

Their investments are dependent on the company. The pension is dependent on the company. If anything happens, I mean, unfortunately, you're out of luck. Yeah. SOL. Okay. Yeah. I mean, there's so many examples of this at that era and it was hysteria. I don't really think there's anything else really to say. Okay. So today the business has been an exceptional compounder providing modest distribution or dividend yield, whatever you want to call it to investors and has had some monster share appreciation, rallying 22,000% since that valley of despair in the early 2000s. And this is even considering the stock's down 20% today from the peak.

As most internet technology companies are, this one's no different. Now, Equinix started as a vendor-neutral multi-tenant data center provider with the goal of enabling secure connectivity and enabling networks to share traffic and data and scale internet usage. And so the name Equinix stands for equality, neutrality, and internet exchange. So they operate as a real estate investment trust, which is basically just a corporate structure that they don't pay Fed tax as long as they distribute 90% of their taxable income to shareholders via dividends or technically their distribution. Yeah.

And that's a really important note here. And this is REITs in general. So it's not just data REITs. And the other thing is people may say, oh, well, when they look at their releases or their supplemental data, they say that they pay a say like 60% of funds from operation or adjusted funds from operation. That's because adjusted funds from operation, AFFO or FFO funds from operation are different than taxable income. But it is a very extremely useful metric for real estate investment trust. So just keep that in mind when you're looking at the payout ratios. It may not look like it's 90%. That's because usually they'll use those AFFO or FFO as the

key determinator here. Right. Yeah. Like AFFO is like the REIT nirvana in terms of metric, right? Like it's what everyone uses. Okay. So today now it is the largest data center operator in the world. They have hundreds of data centers across the world. I think the number is like 250 of them. And these are like gigantic facilities, right? Like they're giant warehouses of computers. That's what they are. The company's exposure to growth trends, cloud, telecommunication, financial services, social media, IT shift to the cloud, hybrid cloud. These are all things that are really driving from a secular perspective, why people are using Equinix more and more over time. And they run a pretty conservative balance sheet, given these are the steadiest cash flows you can find really. At the end of the first quarter, the company had net leverage of about 3.8X, which is pretty low for REIT. It's in the mid lower range. So it's pretty conservative, even though if you're looking at

their debt structure, like, wow, this is a lot of debt. Again, this is a real estate investment trust, capital-intensive business. And if you look at their debt agreements, 94% of it is locked into fixed rate agreements with nice low rates, which is smart now that you look at what's happening with tightening, right? I saw a lot of companies really shoring up their credit facilities over the last couple of years and now they look like absolute geniuses. So, if you look at growth, revenues have compounded around 15% a year over the last 10 years. So, again, not just some boring... It's consistent if anyone takes a look if you want to go on stratosphere go have a look at what it looks like the revenues it's just steady as she goes it's not gonna double

year over year but it is chart porn exactly it's just like constantly constantly going up it's about what yeah like on average it's always like in that same range. I would say on 12% to 16%, 17% probably around there. Obviously, it's not going to be 15% every single year, but it looks quite nice. Yeah, it's fun to look at those charts. They're very consistent and they always go up. Adjusted funds from operation, that's gone up 2.5x in the past five years. Very high stable margins, about 46, 48% EBITDA margins. I had a note here at the bottom about FFO and AFFO. Should

I just go over that really quick? Yeah, I think it'll be useful. We've talked about it before, but I think for people, it's just such an important metric for REITs in general. And then when you're done explaining the intelligent REIT investor, I think it's a very good primer for anyone wanting to learn more about REITs. Yeah. Brad, what's his name? Yeah, I can't remember. I read it a while back, but I always, I go back to it every probably year or so. I'll kind of read a couple of chapters just to refresh my memory. year or so. I'll read a couple of chapters just to refresh my memory.

So funds from operation or FFO, again, if you're looking at Brookfield Asset Management, this is the metric you're looking at is FFO. A lot of these types of businesses, real estate businesses, CapEx, basically ones that have high depreciation lines. And so FFO is net income, add back depreciation and amortization, subtract capital gains from property sales. So again, you're basically making some adjustments for net income to show real funds from operations. You're making it more cash-like metric. Now, once that is determined, typically, you'll just throw an adjustment on it to adjusted funds from operation. So now you take that FFO number, you add rent increases because that's important. You subtract CapEx, subtract routine maintenance amounts, and you're getting the actual adjusted funds from operation number.

So that's basically how you calculate it. Do you have any comments on just how you can think about that conceptually? Yeah, so for those who are not really used to that and say, well, why would you add that back in? Well, think about it for a second. When you have REITs, they own these facilities for Equinix, but if you have an apartment RE Reed, they own the apartment. So amortization and depreciation is definitely an accounting principle.

So definitely, specifically depreciation, when you look at it, you're assuming that the asset will be worth less over time. But when you're looking at these types of businesses, you can make a very strong argument to say that they actually are not worth less over time. If anything, they're worth more, at least keeping a constant value. Obviously, you have to maintain them and things like that. So there is a cost to that. And amortization, it's also just an accounting principle where you amortize the cost of something over several years. And then it just allows you to reduce your taxable income over time, but you actually just pay the cost of it the year in which you buy it. The actual money is still coming out the year in which you buy it. So I think just for people to

wrap their heads around it, when you think about it that way, you're like, okay, yeah, that's right. It's actually has really no impact on the cash coming into the business. Yeah. It's this whole concept of you hear Buff talk about this so much, but like owner's earnings and stuff like that. It's basically like if you're the business owner, say you don't know anything about accounting, know nothing about accounting, and you're the owner of some business, a lot of these metrics that will affect what will you have net income on official financial statement just are not cash that the owner ever thinks about. It's imaginary for a lot of it.

And so people have over time tried to correct some of those things. Now, it's impossible to really get gap perfect. People are so quick to criticize it and say like this and that. But at the end of the day, there's just so much nuance that you're never going to come up with a perfect solution for every business. Yeah. And depreciation can be useful for other types of business, right? So, if you have... For sure. You know, if you're a rental car company and you own cars, like you normally... Those are depreciating. sure you know if you're a rental car company and you own cars like you normally obviously this year

is a bit different but normally the cars will go down in value so that depreciation makes a lot of sense but for hard assets like this that tend to keep their value well or at least go up over time a little less useful yeah it's an effort to measure the costs on a yearly basis even if those cash outlays never come. Yep. Right. And so that's basically where it is. Okay. So back on track with Econyx, the largest data provider. Let's talk about co-location. Okay. This term co-location, even for me, it took a while to figure out what is co-location. It sounds so technical.

What is this network and data center talk? What does this actually mean? Just think about it like co-location. Co-locating. Multiple tenants are leasing digital infrastructure space from a data center operator. So they are co-locating inside of this data center. They are leasing space inside of the data center and using the space in the data center to run their servers. So Equinix sells three basic things. Ultimately, they sell space in the data center, they sell power, and they sell interconnectivity. Those are their three offerings inside of a data center. Okay, so space is like actual location for them to store their network equipment, their servers. Power and cooling is an immense cost for these

types of facilities, right? These servers are running hot all day. And so they need to provide power, not only to run the servers, but also to run some of this HVAC cost and interconnection, which is really interesting between their customers inside the data centers. So if you want to connect with the servers of two large businesses, because you guys are partners or something, there's actually advantage because you guys are partners or something. There's actually advantage of you guys being in the same data center together. So this is something that I didn't really know about until I dug more into the business. And so they own the building, they do the power and the cooling, and they own the exchanges and

cross-connect type infrastructure. The customer owns their own servers, their own storage, and their own networking equipment has to be owned by the customer and placed inside of the facility. Now, if you look at costs for running these data centers, I was curious about how much is electricity on average. And it's going to range quite a bit because their facilities are in every corner of the world. But on average, power is about 12% of total revenues to run it. And that's not so high when you think of on a gross profit perspective. It is about 27% of their total costs, but only about 12% of their total revenues. Labor is their highest cost, then power, and then consumables and other,

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blossom social in the app store and I'll see you there. So if you look at who's out there today, I mean, there are other competitors who are doing these data centers, you know, like they're putting together these gigantic facilities, putting them all around the world, connecting them, having customers put their servers inside of these data centers. And so Equinix being the largest one, Digital Realty is DLR. That's another one. CoreSight is another big one. Just got bought by American Tower. But if you look here, you can see the pie chart. Equinix is quite a bit larger than all the other ones. And in terms of interconnections, they have double more than anyone

else by far. Yeah. And Brookfield Infrastructure Partner owns a few too. So for those of you who own that, or even BAM obviously owns part of VIP. So you'll have some exposure to that industry too. Yeah, perfect. All right. So what are the competitive advantages? So there's this concept of interconnections that I was talking about. So with these 230 plus data

centers that they have around the world, it's very attractive for the large cloud players. Okay. And these network providers where they're choosing to host their services, because today Equinix has more than 428,000 interconnections. For context, they had 285,000 in 2017. So this number is growing quite fast. And by interconnections, that just means that multiple tenants are connecting to each other inside of the facility, right? And so this is where some network effects really start to play together, right? Like if Amazon Web Services, their main provider of choice in terms of location on where

they're housing their servers is Equinix. And you're choosing if you're going to go with Equinix or DLR, CoreSight, whatever. There are some competitive advantages in terms of being where everyone else is. This is a classic network effect, right? This interconnection type network effect is something that you would never think of. And this is why I think some business like this has some competitive advantages that no one really thinks about or talks about. And they're real. They're very real, especially if you know this segment well. And if you're a network engineer, you probably know way, way more about what I'm talking about than me. 50 million times more if you're a network engineer. You could

be running laps around this. But this is important for the generalist to understand, is that this interconnection is really important. So they ultimately are choosing Equinix as their data center provider to host their networks and infrastructures. And that's a positive feedback loop. So more companies will be inclined to co-locate and interconnect with these tenants across multiple global locations. And so that's the gist of it. Now, if you look at the major hyperscaler cloud players, you have AWS, Azure, Google Cloud, Oracle. Equinix is by far their largest provider in terms of single provider by a lot. Oh, yeah.

If you look at AWS, 42% of AWS's servers are like what they'll say, edge nodes are in Equinix facilities. DLR is next with, it doesn't say on there, but if you were to guess probably less than 10% based on that. Yeah. And Azure 43%, Google Cloud 44%, Oracle 56%. So the three major cloud players, AWS, Azure, Google Cloud Platform, all above 40%. And I think that's growing over time. And so you can see here, it's become the player of choice, right? It's become the operator of data centers of choice for these large players because of like, dude, their footprint is immense. Yeah, it's massive.

Every major city center, the connectivity is insane. It's crazy. Like 230 of these things. So, any comments there? No, no. Keep going. Yeah, I'll chime in if I need to. Okay. This has been a heck of a segment. Dude, I like these deep dives though because I learned so much writing this. You know, like as you write this stuff you learn a lot i mean i own it and i'm learning a few things yeah yeah geez i'm gonna need to start a position all right switching costs so you know we like to talk about network effects and switching costs as like classic competitive advantages.

So aside from there being contractual terms, like they're kind of locked in, a tenant that begins making interconnections within Equinix data centers, and they set themselves up around the globe, they face gigantic large-scale business interruptions if they're to uproot their servers and move elsewhere. And now they do build redundancy, of course. They build massive redundancy in servers in case anything goes wrong. They have lots of backup. And that's why they actually geographically have so much redundancy as well. It's important for these businesses. But even then, there is so much headache moving this stuff, right? It doesn't even make sense.

And if you look at the unit economics, so the average tenant pays between $1,500 and $2,450 monthly recurring revenue per cabinet. Okay, so per cabinet being like per server. The average cost to move a cabinet is about 10 grand, right? Like that's what, anywhere from seven to five months of MRR? Yeah, about that. Yeah. Right. So if a tenant were to do that, it doesn't make a whole lot of sense. Like it's going to take multiple years for this decision to pay off in some cases. And for those reasons, churn remains very low. Now moving forward, they're

going to continue to build obviously more connectivity. And my main bear case thesis was, how do they actually achieve incremental ROIC, right? It's not like Costco where you can build a new location and they can expect that they build some new Shanghai location and it kills it, right? Like there's lineups at the door for new customers. That's literally them unlocking their total adjustable market by building more Costcos. Whereas this, it's like, it's the internet, right? Like, what do you mean, right? Like, how does that make sense? And if you look it up, and these are the important things we track at Stratosphere,

because one of the risks is listed as basically what I'm explaining. But then it also shows here average gross profit per data center operation. And so it has been steady at about 13, almost 14 million. Like you can see the graph, that's a pretty steady chart year over year. So it's been really steady at almost 14 million in gross profit per data center location. Because as they are opening these new locations, these new data centers, there's more people housing their servers in them. It's not like they're having a tough time with vacancy, right? It's not like they're having a tough time with vacancy, right?

No, but I think that is one of their bear cases as well, at least short term, is the chip shortage. So even though they don't own the servers, that's one thing. But when your clients, they own the servers, they can't get those orders in. I mean, we've seen it time and time again, right? I think we're hearing that it could continue another year or two now for most chip manufacturers. So that's something to keep in mind is that it could definitely impact Equinix on a more short-term basis. There's definitely a case to be made that they'll face some headwinds with that. For sure. Luckily, you look at the business itself and it's not like they're the provider of those chips.

So they're going to be facing that kind of supply chain and cyclicality issues. Their existing customer base is drip, drip, drip, drip, drip, drip, steady stream of income. So sure, it could definitely affect them being... I would say growth, yeah, a little bit. Yes, that's right. That's right. So looking forward, I mean, more growth of digital, more need for infrastructure. The cloud is still nascent. Dude, if you look at workloads versus

private cloud versus moving to a public cloud, there's a lot of growth still. This is why people are so bullish on AWS, Azure, and GCP. There is still a ton of workloads on private clouds that need to move on public cloud or move to a hybrid setup, which is extremely common now for these large SaaS providers. These large enterprise companies will have their own solution. They'll have their own data center and they'll have public cloud as well. And so they're running on the hybrid approach. This is great for Equinix because they can assist both of those needs. And so this really sets up well for them. Rounding this all out, evaluation. Okay. So if you look at the PE of a REIT or Equinix, you've been listening to this and you're like, it's at 150 times earnings. Oh my God, expensive company, you'll be alarmed.

It's just not the right metric. It trades at around 25 times AFFO. I don't know REITs that well, so I'm not going to really comment on that. I do think it's quite fair given that it's in the upper band of rates for sure, but that's because this was one that actually has a huge secular trend behind it. So, when you put that together, I mean, I'd rather much rather own this with a longer time horizon than some other REIT personally, not that I own any, but yeah. Yeah. And if you're wondering why we're not looking at PE, just rewind our conversation a little earlier in this episode where we explain AFFO and FFO and the reason why you don't want to be factoring in depreciation amortization, because the PE is very dependent on those two items, the earnings, it has a big impact on it. I mean, for me, this company, I think, especially for people that are close to retirement or

at retirement, this is a great way to get exposure to technology in general, but the growing cloud infrastructure and still getting a nice growing dividend at the same time. I think when you're building, especially a dividend portfolio, whether you're at retirement or not, oftentimes you're very heavily weighted in certain sectors and that's usually not the tech space. And this is just a great play to get some exposure to that. I think it's a company that pretty much anyone should hone. Yes. But I'm just...

It fits so many portfolios. It's crazy. It could actually fit almost any portfolio. And that's why I'm surprised it's not ridiculously overvalued because so many pro investors could just put it in their clients' portfolios. Yeah, I think it's because it's not a sexy name. I think it's because you hear so much about those SaaS companies growing quickly. And you have this company that's in a space that's very similar when you think about it. It's like the backbone of the cloud infrastructure. And people just don't get excited. They'll see the revenue. It's like, okay, like 10, 15%. It's not growing 50, 60% a year. But then when you kind of look back and just the consistency and also the fact that it does pay a

dividend, it's pretty cool that you can just sit back relax it has a downturn that's fine you're still collecting that dividend hell maybe you can just add to it when there is a downturn which it doesn't happen that often for equinix it will get pullbacks but you'll never really see like a 30 40 40% drop. I think 20%, 25% is probably as much as you'll see. Maybe I'll be proven wrong in the next few years, who knows? But that's kind of my way of wrapping it up. I think it's just a great business. Clearly, I'm biased here because I own it, but there's a lot of things to love. Do your research on top of what Brayden talked about and you'll see. You bought more shares recently, didn't you?

Yeah, I bought more. That was in the joint TCI update, right? Yeah, I did. Yeah, it was one of, I actually had a pullback with a lot of other tech plays, not as much clearly, but I added. Yeah, cool. Very cool. And you're right. I mean, dividend growth type investors, look no further, right? It has become, and I don't even look again, I don't own shares. I probably should.

It has become one of my stock answers. No pun intended by that actually at all. My stock answers. It has become one of the first things I think of when someone in my parents' network had too many drinks and asking me what they should buy in their stock portfolio. And I hate this question because you get some downturn and they're like, oh, Britain, what the hell? I bought Equinix. So, that's why I hate this conversation too much. But if i've also had too many drinks too sometimes i spell the goods and i'm always like uh equinix probably and so then that's just become one of my stock answers because it pays almost a two percent yield exactly that's what i was gonna add it's not like

a 0.25 dividend where okay it's growing at but it's going to take you forever to get something substantial. This one is actually, the base is pretty decent for a company still growing at that pace. It's a pretty good, what Buffett used to call stock bond. Yeah. He used to have that term quite a bit. I haven't heard him use it in a long time. He used to call things stock bonds, which are like, why own a bond and get a similar yield when you can have all the upside from a growing corporation? Yeah. REITs in general, I think,

would fall into that. The good REITs, obviously, Equinix is one of them. I think you'd have infrastructure plays, pipelines, stuff like that, that would fall into stock bonds. You're looking for businesses to hear that are not necessarily growing super quickly, but they are growing and they oftentimes have a good dividend. Is 15% compounded on the top line? Yeah. Are you not entertained? Yeah, but I was talking more in general, I think. But yeah, I think that's what the whole stogmon thing.

But yeah, it was a great discussion. We had another segment, but I think we'll keep that for next episode. Let's wrap it. Yeah. Thanks so much for listening, folks. Let me know. Follow us on Twitter. I am at Brado Capital.

You are Fiat. Are you Fiat underscore Iceberg? Yeah, that's it. And I've been so busy that I also had to reset my phone. So I haven't tweeted in like 10 days so i have to get back on it this weekend so if any of you are following me wondering why i'm still alive still around proof is that we're recording this right now on what june 2nd so i am still alive yeah oh thank goodness me all right yeah so hit us up or leave us a review or go on our website

and let us know or go on the strat community. Let us know if you like these deep dives because I think they're fun. And I don't know, I think a lot of people get a lot of value out of it. Maybe just I get so much value out of it, so I'm biased. But yeah, let us know. Really appreciate that. Join tci.com. Yesterday was June 1st. We reported the portfolio updates. And you'd see Simone just bought more Equinix, this company we've been talking about. And I really like that you brought up this Canadian stock, US stock bias. Because recently what's been working, you zoom out and the S&P 500 has hammered our

beloved Canadian stock index. It's just the facts. I'm just here to present them. I'm not here to comment on them. I'm here to present the facts. Yeah, I know. Exactly. Maybe next month when Braden shows his portfolio, he's going to have a position in Equinix. Who knows? Maybe. I just bought SPGI. Dude, I'm out of money. I'm out of money. I need more people to subscribe to Stratosphere because the dirt and ramen is starting to absolutely, oh boy, the dirt and ramen. It's piling.

I actually, you know what's really funny? I actually had ramen for lunch today. Like no joke. I actually had ramen for lunch today. It was good. Like actually ordered or just like the stuff you buy from like... Itchy band, baby. Okay.

Not Mr. Noodle. I'm too high class for that. Yeah, I'm on to the less peasant, peasant meal. So, with that note, go to stratosphereinvesting.com. If you do want to join a personal paid plan, it's 20 bucks a month, but you can get it for cheaper if you type in code TCI. That's for the podcast, code TCI. I'll give you 15% off a personal plan. You're going to get the advanced metrics and this deep dive that I'm talking about with Equinix. The data on locations, interconnections,

number of data centers, you're not going to find that on crappy Yahoo Finance. You're going to find that on Stratosphere. So go check that and take out 15% with code TCI. We'll see you in a few days. Take care. Bye-bye. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.