Equinix slips as Wall Street awaits more clarity on short seller allegations

Shares of Equinix (EQIX) are under pressure on Wednesday after Hindenburg Research accused the company of accounting manipulation and selling an “AI pipe dream.” Commenting on the short report, Wells Fargo acknowledged that Equinix and other data center REITs “take some liberties” with AFFO add-backs, but noted the company conforms to maintenance capex classifications. More cautious on the matter, HSBC downgraded the stock to Hold as it awaits more clarity on the accusations and sees “limited upside potential.”

ACCOUNTING MANIPULATION: In a short report titled “Major accounting manipulation, core business decay and selling an IA pipe dream as insiders cashed out hundreds of millions,” Hindenburg Research said that its investigation, “which included a review of financial and litigation records and interviews with 37 former Equinix employees, industry experts and competitors, revealed that Equinix manipulates its accounting for AFFO, the key profitability metric for REITs. We estimate this metric was overstated by at least 22% in 2023 alone… These accounting manipulations have manifested in what look like obviously distorted company metrics.”

According to the short seller, Equinix’s “manipulation of maintenance CapEx has resulted in a cumulative $3 billion boost to reported AFFO since 2015,” and its “questionable AFFO accounting has contributed to an estimated $295.8 million in stock award grants to top executives who have personally benefited from these accounting games.” “Even if you ignore the findings of our investigation and take the financials of Equinix at face value, the company trades at elevated levels,” the report added. “Beyond accounting, Equinix has relied on a risky approach to growing revenue: overselling power capacity in the hope that customers won’t use all the power they’ve contracted for. A former executive told us it is ‘the dirty secret,’ stretching Equinix’s infrastructure to the limit.”

Contacted by The Fly, a spokesperson for Equinix said the company was “investigating the claims” and would “respond in due course.”

AWAITING MORE CLARITY: On the heels of Hindenburg’s report, HSBC downgraded Equinix to Hold from Buy with an unchanged price target of $900. The firm believes Equinix’s capital expenditure classification debate is likely to continue while the power capacity accusation, if true, “could have major consequences.” HSBC awaits more clarity on the accusations and citing limited upside potential, moving to the sidelines. The onus now appears to be on Equinix to address the accounting manipulation accusations, it adds.

TEMPORARY ROADBLOCKS: Wells Fargo notes that a short report published by Hindenburg Research is driving weakness in shares of Equinix. The short-seller alleges that Equinix “manipulates” its non-GAAP AFFO metrics and the firm acknowledges that Equinix and other data center REITs “take some liberties” with AFFO add-backs. However, the firm adds that Equinix conforms to maintenance capex classifications, similar to other data centers, and says it has heard similar short theses for years on the group and these “historical short attacks have only been temporary roadblocks.” The firm has an Equal Weight rating and $825 price target on Equinix shares.

PRICE ACTION: In afternoon trading, shares of Equinix have dropped about 5% to $804.97.