Investors should pull the plug on Equinix

Equinix (Nasdaq: EQIX) is a real-estate investment trust that invests in data centres in order to rent them out to technology companies. It has amassed an impressive portfolio of 282 AI-ready data centres in more than 70 countries and has partnership agreements in place with a large number of tech giants, including Nvidia, Oracle, Amazon Web Services, Dell and Google.

AI is clearly a transformative technology. However, rather than opt for companies working on AI, many investors have adopted the indirect approach of buying firms facilitating the boom, notably those operating data centres. Data centres are used to store vast amounts of information collected by technology companies, which need the data to train their AI models.

At present, there is a huge demand from Big Tech, which is trying to build out capacity as quickly as possible. However, just because an industry is doing well doesn't mean that all the shares in it are worthwhile investments.

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Equinix's shares seem to have lost momentum

All this sounds positive, but there are a few notable problems to bear in mind. All the tech companies have been expanding data-centre capacity on the assumption that the demand for them will continue to grow at a high rate. This supposition may be overoptimistic, especially given the mixed impact of AI on real-world productivity that many firms have experienced. Several major studies have highlighted a high failure rate of AI projects.

There has also been growing interest in AI models developed by technology firms in Asia that potentially require much less computing power and therefore need fewer data centres. Furthermore, a backlash against data centres – which are unsightly, noisy and wasteful as they consume a great deal of water and energy – has affected some projects that Equinix has been involved in (such as one in South Africa). The upshot is that demand could slow down, or even reverse.

However, even if appetite for data centres continues to grow, Equinix's extremely high valuation looks likely to hamper the stock's progress. The firm is expected to grow revenue at under 10% a year over the next few years, a solid but not spectacular pace, and it achieves a return on capital employed (ROCE) of only 6%. Yet the stock trades at 50 times estimated 2027 earnings, and nearly ten times current sales. While other data-centre firms also have high valuations, some of them are more modestly valued. Iron Mountain, for instance, is a similar business selling for a more modest (but still high) 40 times 2027 earnings.

From a technical perspective, moreover, Equinix's shares seem to have lost momentum. They have drifted downwards over the past six months and are trading below both their 50- and 200-day moving averages. I would therefore suggest shorting Equinix at the current price of $953 at £3 per $1. I would cover them if they hit $1,283, which gives you a total downside of £990.

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