Hindenburg Bets Against Data Center Owner Equinix in New Report

(Bloomberg) -- Short seller Hindenburg Research targeted data center owner Equinix on Wednesday (March 20), alleging that the company manipulates its accounting and is selling an “AI pipe dream.” 

Hindenburg’s disclosure of a short position and its allegations raise questions about the future for Equinix, which has been benefiting from the expectation that artificial intelligence companies will need even more data centers to power the technology. Equinix shares were pummeled Wednesday and the company pulled a previously planned bond offering after the report hit.

Equinix dropped 2% to $827.35 at 3:28 p.m. in New York. The company’s bonds also weakened Wednesday, with its 3.9% bonds maturing in 2032 trading 20 basis points wider at 123 basis points more than Treasuries around 3 p.m. in New York, according to Trace data.

“We are aware of the report and in the process of reviewing claims made therein,” an Equinix spokesperson said in an emailed statement. “We take these matters seriously, and we will not respond further to the claims during our review. We will report back once that review is complete, as appropriate.”

Hindenburg alleges that the nearly $80 billion real estate investment trust is manipulating its accounting for a key profitability metric – adjusted funds from operations – and overstated that figure by at least 22% in 2023. The short seller also said Equinix trades at elevated levels even if financials are taken “at face value.”

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Equinix has determined not to proceed “at this time” with its planned offering of nine-year euro bonds, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. Demand was strong for the offering before it was pulled, with the company moving pricing tighter.

While it’s not unusual to pull a bond offering when big news breaks, the accusations in the report could make it tougher for Equinix to access capital if the company can’t adequately push back on the allegations, according to Bloomberg Intelligence analyst Jeffrey Langbaum.

Earlier this month, Equinix said Adaire Fox-Martin, who used to work at Google, will become its new president and chief executive officer in the late second quarter, with current CEO Charles Meyers moving to an executive chairman role. The company has been expanding its data center footprint, opening buildings in cities including Dublin and Frankfurt. In 2023, its revenue rose 13% from a year earlier, and its AFFO was up 11%. 

Jeffrey Langbaum, a senior industry analyst at Bloomberg Intelligence, said: “A report by Hindenburg detailing its short position on Equinix – based primarily on accounting practices that allegedly inflated profitability – paints an especially ugly picture when paired with the REIT’s management changes announced last week.”

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The data center owner has said that accelerating growth in artificial intelligence is helping to drive demand for its properties. But Hindenburg argues that the AI boom poses a risk to Equinix’s outlook, as AI growth will potentially double power demands at Equinix’s properties and require many centers to be upgraded. And it’s accounting methods have given the market the impression that Equinix is a “cost-leading outlier” in the market, Hindenburg alleged. 

“This false impression, combined with general market euphoria for AI, has resulted in investors rewarding Equinix as though it is a key AI beneficiary, when the opposite seems true: AI poses a risk to Equinix’s already power-constrained facilities,” the short seller said.

Equinix said it’s confident in the company’s ability to create long-term opportunities through its “distinctive advantages.”

The firm also continues “to see Equinix as highly relevant to customers as they pursue their digital transformation agendas and deploy distributed, hybrid and multi-cloud infrastructure as the preferred architecture of choice,” the spokesperson said.