My Take on the $EQIX Short Attack #investorrelations #capitalmarkets #finance #accounting
Published 2024-04-01
#CapitalMarkets / #InvestorRelations in Two Minutes or Less
My Deep Dive into the #Equinix ($EQIX) Short Thesis
The best short attacks are typically based on an irrefutable premise.
What is the irrefutable premise that makes $EQIX a short?
The $EQIX bull thesis is elegantly simple.
As long as data creation and application development continue to grow, there will be a secular bull market for data centers regardless of underlying asset differentiation.
The bull thesis is hard to attack, given the underlying trend shows no signs of near-term weakness or reversal.
Three Components of the $EQIX Short Attack
Accounting Manipulation Allegation
Oone does not need to be a forensic accountant to strongly challenge the allegations against $EQIX.
Two ways to refute the #accounting allegation:
1. ASC standards, and
Accountants must justify their applied accounting treatments; they can’t just make up their decision. The ASC standards created by FASB give accountants the justification behind a given accounting treatment.
2. The Audit Risk Model
The equation AR = IR X CR X DR helps refute the allegations here. My guess is that no one messed up the statistical sampling plan to an extent that someone incorrectly calculated the Risk of Material Misstatement!
Over Selling Power Allegation
The over selling of power seems to be a contractual risk rather than an accounting issue.
Investors have been aware of such business practices in data centers since at least 2016.
A comparison of data center design illustrates why over selling of power can occur:
Consider a 4 / 3 data center, consisting of 28 MW, and 4 independent rooms.
Each room consists of 6 MW of sellable power and 1 MW of reserve power.
The result is 24 MW for sale and 4 MW of reserve at all times.
A ring-bus data center design, ties the four rooms together.
Under this design, the 28 MW data center, with 4 rooms, has 26 MW of sellable power and 2 MW of reserve power. The 2 MW of reserves can float across the four rooms because they are now connected.
Data center operators using a 4 / 3 design have been known to over sell power.
A negative business practice with significant contractual risk to the company and clients.
Hyperscale Problem
The issue that hyperscale providers are disintermediating cross connect represents the most compelling issue.
Disintermediating cross connect erodes $EQIX of its asset differentiation valuation premium.
For me the biggest issue revolves around decelerating cross-connect growth over time.
If I were an analyst, this trend alone would put me at a Hold or Sell rating.
Key Learnings
Accounting shorts can be difficult to prove due to ASC standards and the Audit Risk Model.
It is hard to short a leader in a secular bull market.
I find the $EQIX short thesis to be relatively weak, but what do I know?!