On Wednesday, HSBC downgraded Equinix (NASDAQ:EQIX) shares from Buy to Hold, setting a new price target of $900. The revision follows allegations against the data center company by Hindenburg Research, an investment research firm known for its activist short-selling.
Hindenburg's report accuses Equinix of manipulating its adjusted funds from operations (AFFO), a key performance metric, which could potentially inflate management compensation and distort the company's financial health.
The allegations suggest that Equinix has been categorizing maintenance capital expenditures as growth capital expenditures, which boosts the AFFO figure. This practice has been a topic of debate within the industry, as companies possess a degree of latitude in how they classify these expenses.
The distinction is crucial as it can significantly affect the reported earnings and the perception of a company's investment in growth versus upkeep.
Further accusations include Equinix's method of compensating its management, which is reportedly linked to the AFFO metric. By inflating this figure, executives could stand to gain more from their remuneration packages. Additionally, the company is charged with recording operational expenses as capital expenditures, which could artificially enhance profitability.
Hindenburg also claims that Equinix has engaged in selling more power capacity to its customers than it can actually provide. This overallocation could lead to operational and reputational risks if customers demand the full capacity they have been sold. Lastly, the report raises concerns about the sustainability of Equinix's business model in the face of competition from cloud service operators.
These allegations have led to the revised stance by HSBC, reflecting the potential risks these issues pose to Equinix's financial standing and market reputation. The new stock price target of $900 represents HSBC's adjusted expectation for the company's stock performance in light of these developments.
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