Wachovia Resuming Coverage of the Data Center Space - Rates Equinix (EQIX) and Switch & Data (SDXC) with an Outperform

May 20, 2009 9:05 AM EDT
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Price: $722.02 +0.92%

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    29 Buy, 7 Hold, 0 Sell

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Wachovia initiating coverage on the data center space with an Overweight rating.

Wachovia analyst says, "We are initiating coverage on the data center space with an OVERWEIGHT rating. Within the group, we are resuming coverage on network neutral data center operators – Equinix (Nasdaq: EQIX) and Switch and Data (Nasdaq: SDXC) with OUTPERFORM ratings. We admit that it is difficult to initiate on anything with an Outperform rating in this current market environment. However, based on our channel checks, we feel confident that both EQIX and SDXC can hit 2009 forecasts. Specifically, we spoke with a few industry contacts in the sector in addition to the routine calls that we made to company management. These include contacts at Level 3 Communications and Cogent Communications. Based on our conversations, we think that the supply demand environment continues to favor network neutral data center operators."

"We believe the network neutral data center space represents a relatively safe derivative way to play on the continued growth of IP and internet traffic. We also note that EQIX and SDXC are two of the few growth stories left within telecom services. Both companies have high visibility into its revenue base and low churn driven by 1 – 3+ year contracts with escalators. EQIX, SDXC, and other network neutral data centers benefit from a supply demand imbalance due to growth in IP and internet traffic and limited available space close to fiber hubs for telecom equipment and networking gear. As a result, EQIX and SDXC enjoy a favorable pricing environment. Lastly, there is high fixed cost leverage in the model and the business environment within a data center is difficult to replicate which limits competition. As a result, we have a high degree of confidence in our forecasts for EQIX and believe the stock deserves some premium to other growth names in telecom."

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