Digital Realty Trust, Inc. (DLR), DuPont Fabros Technology, Inc. (DFT), Equinix Inc (EQIX): Should You Consider Buying a Data Center REIT?

The company seems to be worth considering with a reasonable business value of around $27 per share at a 22 times multiple. But that’s only if it can maintain revenue of around $370 million, cash earnings of $80 million, and a cash profit margin of around 21.6%.

Equinix Inc (NASDAQ:EQIX), which connects more than 4,000 companies inside the world’s most networked data centers, is a little different than the REITs previously mentioned. It is not currently a REIT, but is pursuing conversion and plans to make an election for REIT status for the taxable year beginning Jan. 1, 2015.

The company is also more of a hands-on data center operator, offering additional services such as technical support, remote services, and network monitoring more freely than other providers do. Its focus on having a wide-ranging neutral interconnection communication hub for cloud service providers, large financial companies, network service operators, and other large enterprises gives it a key competitive advantage. The company’s scope also means that it has a more diverse customer base. No single client accounts for more than 10% of sales.

Equinix Inc (NASDAQ:EQIX)’s recent growth has been impressive with revenues increasing 15% in its latest quarter, income from continuing operations jumping 10%, and its FFO equivalent gaining 8% from 2012.

Equinix Inc (NASDAQ:EQIX) shares look a bit rich with a reasonable fair value of around $158 a share at a modestly discounted 20 times multiple. This calculation is based on revenue of around $2.3 billion, cash earnings of $386 million, and a cash profit margin of around 16.8%.

Conclusion

Data center REITs certainly look intriguing. Their story seems solid and valuations appear mostly inviting, but the sector hasn’t been time-tested like conventional REITs. It’s not quite clear how data center REITs will fare over the long-term in a less favorable and more competitive environment. Nonetheless, they look an interesting shorter-term consideration.

The article Should You Consider Buying a Data Center REIT? originally appeared on Fool.com and is written by Bob Chandler.

Bob Chandler has a long position in DuPont Fabros. The Motley Fool recommends Equinix.

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