Following a report from activist hedge fund Hindenburg Research, which slammed the accounting practices of the world’s largest data center business, and accused Equinix of misclassifying “maintenance CapEx” as “growth CapEx,” making its maintenance costs look lower and Equinix seem more profitable, the company received a subpoena from the Department of Justice’s Attorney’s Office for the Northern District of California.
Hinderberg claims that Equinix overstated its adjusted funds from operations (AFFO), a key profitability metric for REITs, by at least 22 percent in 2023 alone.
The company also announced an internal investigation by its Board of Directors. In the statement, Equinix emphasized its commitment to transparency and accuracy in financial reporting, asserting its history of integrity and reliability. In a statement, the company expressed its commitment to cooperation and said, “We believe we have earned the trust of our investors – and all our stakeholders – by reliably delivering on our commitments with integrity and meeting the requirements of our customers, as we have demonstrated throughout our 25-year history.”
The accusations levied by Hindenburg Research, suggest that in total the alleged manipulation of CapEx has resulted in a $3 billion boost to AFFO since 2015, and a $295.8 million in stock award grants to top executives. The report also alleged that Equinix has been overselling power capacity, and also took a stab at its artificial intelligence claims, stating that Equinix facilities are unable to cope with the power demands of AI.
Despite the allegations of accounting manipulations, some industry stakeholders have voiced support for Equinix. BMO Capital Markets maintained its outperform rating, dismissing the “rehashed cloud risk thesis,” while TD Cowen characterized the report as a repetition of previous short theses, highlighting the broader industry practice of overselling power capacity.
However, concerns raised by Hindenburg Research and echoed by industry experts underscore the complexities of Equinix’s business model. Retail colocation providers like Equinix, who sell power up to a flat rate, may face challenges in accurately gauging power utilization compared to competitors like Digital Realty, which sell power in fixed chunks, says Daniel Golding, a data center expert in an interview with Capacity. “They’re a retail colocation provider. They sell power up to a flat rate and allow tenants to draw up to the limit. But on average, the power they’re using isn’t at the limit” he noted.
According to Golding, there are entirely different scenarios. “Digital Realty has a different model, they sell capacity on triple net leases, if they have 30MW of power, they might sell it in six 5MW chunks. Then you can’t oversell. But Equinix might have 100s of customers who are not going to reach their cap.”
Since the report was published, Equinix’s stock has dipped around seven percent and was down less than one percent following the announced audit.
Equinix has demonstrated significant growth over the years, expanding from 51 data centers and quarterly revenue of $249 million in Q1 2010 to 260 data centers and an estimated $2.14 billion in quarterly revenue in Q1 2024, according to company data.
