Equinix (EQIX) Q2 Earnings: What's In Store For The Stock?

Equinix Inc. (NASDAQ:EQIX) is set to report second-quarter 2016 results on Aug 3. Last quarter, the company posted a negative earnings surprise of 3.56%. Notably, the stock has underperformed the Zacks Consensus Estimate in all of the trailing four quarters with an average negative surprise of 3.95%.

Let's see how things are shaping up for this announcement.

Factors at Play

Equinix’s footprint spreads across various geographical regions and in the second quarter, the company stands to gain immensely from increasing popularity among major tech industry players looking for data management.

Acquisitions have been a major growth driver for Equinix and the company has expanded its data center capacity in many of the key markets since 2003. We expect the company’s buyouts of Telecity Group, Bit-isle and Nimbo to boost the top line in the quarter.

Expansion in important markets and consolidation of facilities in existing ones have been an essential aspect of Equinix's core strategy. We believe that the company’s focus on offering upgraded technology to attract clients will drive its revenues and profitability in the to-be-reported quarter.

Nevertheless, we remain slightly cautious about huge capital outlays that may hurt Equinix’s profitability in second-quarter 2016 as well as the full year. In Mar 2016, the company announced an aggressive expansion plan for the whole year with targeted investment of over $4.5 billion. This will include the opening of data centers, expansion of colocation space and acquisitions.

Moreover, increasing competition from established Internet data center operators such as AT&T (NYSE:T) , Level 3 Communications, COLT and Verizon will hurt product pricing, thereby denting margins.

Additionally, the telecommunications industry is undergoing consolidation. As customers combine their businesses, the requirement for co-location space will decline, in turn, hurting Equinix’s overall growth prospects.

Earnings Whispers

Our proven model does not conclusively show that Equinix is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to surpass estimates. But that is not the case here, as you will see below.

Zacks ESP: Equinix has an Earnings ESP of -2.22%. This is because the Most Accurate estimate of $3.09 is pegged lower than the Zacks Consensus Estimate of $3.16.

Zacks Rank: Equinix’s Zacks Rank #3, when combined with its negative ESP, makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are a couple of stocks which you may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Qualys Inc. (NASDAQ:QLYS) , with an Earnings ESP of +12.50% and a Zacks Rank #3.

Mercury Systems Inc. (NASDAQ:MRCY) , with an Earnings ESP of +26.67% and a Zacks Rank #3.