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Equinix, Inc. (EQIX)

“International Data Corp (IDC), a market research firm that tracks trends in information technology (IT), estimates that the amount of data created and replicated has grown nine times over the past five years and will surpass 1.8 zettabytes in 2011. One zettabyte is equivalent to the information stored on about...

“International Data Corp (IDC), a market research firm that tracks trends in information technology (IT), estimates that the amount of data created and replicated has grown nine times over the past five years and will surpass 1.8 zettabytes in 2011. One zettabyte is equivalent to the information stored on about 250 million DVDs. The data storage industry is at the heart of these structural trends, both enabling and benefiting from the virtual revolution.

“For one, data from IDC indicates that the cost of network storage has declined steadily to about $1,400 per terabyte in the second quarter of 2011 from $2,335 per terabyte in 2009, facilitating a rapid expansion in world-wide storage capacity. IDC expects the number of servers worldwide to grow by a factor of 10 over the next decade, while the amount of information managed by enterprise data centers will expand by a factor of 50. Demand should be particularly strong in the health care and financial services industries, both of which face new regulatory requirements that will require them to store more data over longer time periods. Meanwhile, media companies have realized that their future increasingly depends upon meeting growing demand for digital content.

“Despite these long-term growth trends, the data storage and management industry faces some near-term headwinds. Although our forecast calls for the U.S. economy to avoid recession through the first half of 2012 and to expand by as much as 3% in the fourth quarter, the uncertainties associated with the painful deleveraging underway in the developed world could weigh on IT spending. At present, tightened government budgets and the threat of recession in the EU pose the biggest risk to the data storage and management industry. Nevertheless, spending on data-related infrastructure typically produces a relatively high return on investment, providing a degree of protection in the event of another growth scare. Moreover, companies can postpone investments in data storage and management only for so long; eventually, the constant influx and evolution of business information from an ever-expanding number of data-capture mechanisms inevitably overwhelms exist- ing capacity.

“Investors seeking long-term growth should take advantage of any temporary weakness to accumulate a position in our favorite names. ... A leading provider of global data services, Equinix, Inc. (EQIX) also stands to benefit from the rise of big data and the simultaneous push to reduce the costs associated with running a data center. The firm butters its bread by providing physical space for networks to exchange critical information; instead of building and maintaining their own data centers, customers lease capacity and locate their equipment in one of Equinix’s international business exchanges.

“Over the past decade, the company has grown its geographic footprint to include 95 data centers in 38 strategic markets, including locations in Europe and the Asia-Pacific region. Equinix recently entered Brazil with the purchase of ALOG Data Centers of Brazil for USD83 million. Management reports that the deal has already generated 60 new business opportunities for Equinix and that the firm has inked leasing agreements with a high-growth provider of cloud computing services and a leading provider of financial services data. More important, the company’s business model creates an internal marketplace where sellers (network providers) can provide local, regional and global services to Equinix’s more than 4,000 customers. In a world where security, speed and reliability are essential to doing business, leading companies such as Bloomberg, Facebook and Netflix (NFLX) relish the opportunity to purchase connectivity and access cloud-based computing services from leading providers such as Verizon Communications (VZ) and Amazon.com (AMZN).

“This network effect essentially transforms data storage from a cost center to a revenue base, a compelling proposition for potential customers. In addition to a diverse geographic footprint, Equinix also benefits from a business model that generates substantial amounts of recurring revenue from six major verticals: network, mobile, cloud, enterprise, content and finance. Not only do all of these categories offer exposure to key long-term growth trends in Internet and data use, but this diversity also cushions the firm’s revenue against weakness in a particular category. During a recent presentation ... CFO Keith Taylor noted that governments worldwide account for about 3% of the firm’s annual revenue. Taylor also emphasized that the rise of high-speed electronic trading meant that the revenue generated from the financial services industry actually continued to grow at the height of the credit crunch and Great Recession. Poised to benefit from rising Internet traffic and increasing demand for reliable data storage and transmission, EQIX rates a buy up to 109.”

Elliott H. Gue, Personal Finance, 11/23/11

Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.