The Chocolate Crisis and Should we sell this Data Centre REIT?

[00:00:00] This is the Canadian Investor, where you take control of your own portfolio and gain

[00:00:06] the confidence you need to succeed in the markets. Hosted by Braden Dennis

[00:00:11] and Simon Belanger. The Canadian Investor podcast, welcome into the show my name is

[00:00:19] Braden Dennis. As always joined by straight out of the bear cave, Simon Belanger

[00:00:26] out of the winter out of high burnation, we're talking about a short report here today and you

[00:00:34] and I are going to go back and forth. It was a very rare unique circumstance where we were

[00:00:40] both shareholders at the same time in a stock hit by a short port by a very very well-known

[00:00:49] own research firm. So this research house is not just somewhat off the street, this isn't just

[00:00:55] some substax seeking alpha article, this is the real deal. Yeah I know I think it'll be a really

[00:01:02] interesting exercise and people can see how we look at things when it comes to short report.

[00:01:07] I think this one was really well done and you can actually well go into detail but you can

[00:01:13] actually validate a whole lot of what they're actually saying in the short report. So before we do

[00:01:20] that out of the bear cave and into the sunlight, start a little bit lighter. Okay, Simon you have to

[00:01:27] minimize the document or put it off screen here for this game. There you go. Okay. This is

[00:01:33] because this game, you know the results are there you can't look at them. A little bit lighthearted

[00:01:38] let's play a game. You know, let's play one of our TCI podcast games. I want you to tell me which

[00:01:45] names of the two that I'll throw up have performed better terms of return year-to-date in the year

[00:01:53] that is wrapping up Q1 2024 here. All right ELF beauty two hot stocks the two hottest midcaps ELF

[00:02:05] beauty and Celsius the energy drink company which one do you think's out perform this year? Probably

[00:02:12] the beauty ones just because I don't know. I don't know the company all that well. Just say it's a

[00:02:17] more cost effective beauty alternative or makeup alternative. Yeah. ELF beauty is the number

[00:02:25] ELF beauty. Yeah, is it ELF beauty? ELF beauty there you go. Yeah, I confirm my in-house research.

[00:02:34] Yeah, in-house research. Number one performing stock on the New York Stock Exchange of the last five

[00:02:43] years but Celsius has also been a hot stock they're now in Costco and Canada too they're everywhere.

[00:02:53] This has been a historic rise it's an energy drink company and you know many people are drawing

[00:02:59] parallels to the rise of monster beverage which is of course one of the greatest performing stocks

[00:03:06] in the history of public markets. So Celsius has been a really hot name it's almost up 50% this year.

[00:03:13] ELF is growing on its monster a few years up 56% on the year. All right, how about next two?

[00:03:20] What I'll call yeah mega caps. Meta or hot company, hot pharmaceutical company Eli Lilly.

[00:03:31] Eli Lilly and Novo Nordisk have both been monsters in the diabetes market I guess insulin and

[00:03:41] GLP one. So this year so far this year? This year you today. I'm gonna go meta yeah.

[00:03:48] Two for two sir I tried to set you up for failure there because they've bought Eli Lilly has

[00:03:54] been a monster but don't cock the suck meta is off to another hot hot start to the year and now

[00:04:03] they're different now he's a dividend bro paying at the dividend bros their money so meta is

[00:04:09] up almost 50% year to date off a monster recovery last year so don't cock the suck. All right

[00:04:17] Bitcoin and dogecoin it's a moment. I think it's probably doves to be honest yeah. Dogecoin has

[00:04:25] doubled but Bitcoin is up 65% year to date all right this is why I'm setting us up for the segment

[00:04:35] Nvidia or cocoa prices yeah commodity yeah probably I know like I was listening to another

[00:04:44] podcast I can't remember which one it was I would give him a shot out I know cocoa prices have

[00:04:49] gone way way up because of just weather events but I'll flip a coin probably cocoa prices then

[00:04:58] you just you just wax the floor with this uh you got all them right and video is almost up double

[00:05:04] but cocoa prices started the year at $4,200 ton or about to smash through 10k a ton through

[00:05:13] a 50 year high the articles I'm reading we are in a chocolate crisis Simon we are in

[00:05:24] a lot of media yeah we have found ourselves in a chocolate crisis they've surged more than

[00:05:29] 250% of the last year 10k per metric ton nearly double the record sent 46 years ago

[00:05:39] so we have a perfect storm of things happening with cocoa prices here and I have a buddy

[00:05:50] well obviously keep anonymous but he just started a new job at one of big chocolate he just

[00:05:57] started a new job at big chocolate so there's a few names that are in that that mix that are

[00:06:02] publicly traded and I just sent in the graph of the cocoa chart and I'm going WTF is this a

[00:06:09] like explain to me is this a real thing he's like oh yeah it's a real thing it's talk of the town

[00:06:14] here a big chocolate and so I started to look into it more bloomberg one of the opinion pieces

[00:06:21] I found basically west africa generates 75% of the world's cocoa and

[00:06:29] it has been a horrible yield and heavy under investment in the region and so there's basically this

[00:06:39] perfect storm of under investment low yields and particularly vulnerable bad weather and disease

[00:06:47] so it says here also yeah to add on that it says here cocoa demand has doubled in the last decade

[00:06:55] he mentions that China has eaten a lot more chocolate per capita in recent years and is you know

[00:07:03] it's not per capita one of the highest consumers of chocolate switzerland and the us were one and two

[00:07:09] but China is consuming a lot more chocolate and they have a lot more people so you have this kind

[00:07:15] of perfect storm bad weather the areas hit by disease west africa has heavily under invested in

[00:07:23] the chocolate crops and we have this rising demand of cocoa consumption which is you know

[00:07:30] why Eli Lilly is surging too it's all that's all yeah making sense here right someone so big

[00:07:37] chocolate and this chocolate crisis is fascinating you see the chart and if you didn't have a label on

[00:07:45] it you wouldn't know if it's cocoa or dogecoin at this point it has gone parabolic

[00:07:50] yeah i mean my cost of living is probably going to be going up because this is the kind of stuff i

[00:07:55] i love dark chocolate like we have to run out of camera frame yeah and you didn't have to run

[00:08:00] very far no i was sorry kind of we keep our storage downstairs and i record my studios downstairs too

[00:08:06] i what i showed for people that are not on joint tci's is 85% dark chocolate so i know a lot of

[00:08:14] people find it too bitter i just love the taste of really like i don't love when my chocolate is

[00:08:19] really sweet i just love the chocolate taste but i don't have seen too much of a price increase

[00:08:24] there's probably a leg yeah and i do go for the store brand which tends to be cheaper and they

[00:08:30] often have like two for one so two for like four dollars or something like that which i think

[00:08:36] it's pretty reasonable for a dark chocolate yeah i find it hilarious that you give me the like

[00:08:43] one second i'm gonna go grab something out of frame and that on this show is when you and i

[00:08:50] signal to each other okay you have a long segment here i'm going to go to the bathroom drop

[00:08:55] grab a drink of water or something you were out of the frame for only three seconds tops so that

[00:09:02] that chocolate is not far from anywhere in the in the baylau j household to my defense it's our

[00:09:10] pantry that's kind of downstairs so that's why i was at close yeah i don't keep it on standby in case

[00:09:15] there's a picture every desk just like emergency pull this drawer if chocolate is required

[00:09:23] okay we started light let's go heavy war into a short report we're gonna cover it kind of front to

[00:09:31] back we're gonna give our take we're gonna give the final verdict and uh you're gonna kind of

[00:09:37] lead this segment i'll jump in here and there especially on the text side maybe later but uh take it

[00:09:42] away for us yeah exactly so the short report you know we wanted to create some intrigues so there was

[00:09:48] a short report from hindenburg research for equinix so the equinix is the data read that

[00:09:54] break in an eye like you mentioned we both own and i'll kind of go over how i approach short

[00:10:00] reports and i know you up like you approach it i think in a similar fashion feel free to you know

[00:10:06] i don't want to speak for you so if there's certain things i forgot feel free to mention it when

[00:10:10] the way you approach them so first of all i don't panic second i'll have a look at the high level

[00:10:17] summary of the short report they'll usually have that i mean this one was the high level summary was

[00:10:22] actually quite extensive by itself it's like here are my bullet points but there's 48 of them it's

[00:10:29] like yeah exactly so it was like i mean if you just read the high level summary you probably got a

[00:10:35] really good idea but i still went into each sections because what i want to do usually is actually

[00:10:41] validate some of the information because a lot of these short reports will interview like former

[00:10:45] employees and clearly that stuff is really impossible to validate where you have to take the

[00:10:51] word for it but when you can validate it with things that are actually found in uh financial statements

[00:10:56] that are official by the company or investor presentations then that's when the short reports at

[00:11:02] least in my opinion gains a lot of credibility and if i think there's a you know there's merit to

[00:11:09] the short report then i'll definitely read the whole thing uh when i read after i've read the summary

[00:11:15] and this was definitely the case given that i do own the stock and most of the time it's a big

[00:11:20] nothing burger however i think it is important to take the short reports seriously because most of

[00:11:26] the time is not all of the time and completely ignoring the short report without even acknowledging it

[00:11:32] is a big mistake in my opinion because when you start doing this i think you're clearly showing as an

[00:11:38] investor that you'll only acknowledge viewpoints that align with your own investment thesis so you're

[00:11:45] only looking for confirmation but by like you have a confirmation bias essentially something that

[00:11:50] will confirm your thesis and if i do find that there are legitimate concern raised by the short report

[00:11:57] i mean i am prepared to trim or sell my position depending on what the situation is so anything you

[00:12:04] want to add there before i kind of start going over at what indenberg researches and then the short

[00:12:09] report i think generally positions you own you should be able to come up with a few sides to to to

[00:12:19] counteract your your optimism a few like what the bears would say type points it's the old Charlie

[00:12:28] Munger quote you should to win an argument you should be able to argue their point better than them

[00:12:33] that is a very classic Charlie Mungerism and i think that that's exactly right and then when these

[00:12:39] short reports come out usually they're going to talk about the main kind of drawbacks the main

[00:12:46] issues with the company moving forward and i think that they've highlighted those structurally beyond

[00:12:52] the accounting issues we're going to talk about so we'll get into all that but none of them should come

[00:12:57] to a surprise nothing in the like tech area that i'm going to talk a lot about has is a surprise

[00:13:04] it's actually the reason i stopped adding to the position and it never really took off it never

[00:13:09] became a core position because this is the real structural issue with the technology landscape

[00:13:14] so to add on to what you're saying cool you can learn a lot from a short report but the core kind of

[00:13:21] points against the business they shouldn't come as a huge surprise and if they do then you probably

[00:13:26] didn't understand the counter argument to the the downside of the business well enough

[00:13:32] yeah and i would say for me i agree with that with the exception of the accounting issues

[00:13:37] that i mean i knew that the their metrics looked way better than some of their competitors but

[00:13:44] i didn't obviously didn't go as far back as in didn't perk research did they went as far back as

[00:13:51] 2013-2014 to show the discrepancies there and then when i started reviewing their numbers with some more

[00:13:58] recent financial statement comparing it to peers which i'll go over um started to make a whole lot

[00:14:04] more sense so that is something that was a bit of surprise for me but the rest in terms of the

[00:14:10] exception of accounting and the exception of fraud yeah yeah exactly generally it shouldn't be a huge

[00:14:16] surprise no that's it and so let's start with hindenburg research because not all short selling

[00:14:22] firms are the same and before i kind of talked about them short selling i mean their research firm

[00:14:29] but they were made very kind of famous with their takes on or their short selling report and for

[00:14:35] those are new to the podcast short selling is just meaning that you're betting against the business

[00:14:40] so you're betting that the stock price will actually go down and you'll make money by doing so

[00:14:46] i won't go into the intricacies of how it works we've talked about that before so feel free to

[00:14:51] revisit some older episodes for that but essentially you're betting against the business that's what

[00:14:55] you're doing when you're shorting a business and if you've been investing for a while

[00:15:00] you're probably familiar with hindenburg research if you haven't here is dtldr so they are well-known

[00:15:07] firm they are known for investigative reports and i've had quite a good track record the research

[00:15:13] is extensive and extremely thorough an example of some success stories if you'd like that they've had

[00:15:21] and there are quite a few of them but this is just a few example so when twitter when musk offered to buy

[00:15:27] twitter they actually shorted the stock so one of the reason they did it was because he was a

[00:15:33] notoriously impulsive individual i think we can all agree with that that's that's not a bad take

[00:15:39] here and they bet that he would either try to walk away or renegotiate the deal which ended up

[00:15:46] which he ended up trying to do that send the stock lower and they covered their position afterwards

[00:15:51] so they made that just means they made the money in short they later went long so they bet let's just

[00:15:58] say they did the opposite so they actually bet that the stock price would increase because they believe

[00:16:03] that the courts would actually uphold the deal and this is what ended up happening so they essentially

[00:16:09] made like money on both sides of the trade here so they shorted it at the right time and then when

[00:16:17] they made their money there they're like you know what now we actually think that the deal will go

[00:16:22] through and we're going along the stock just because we think it's actually going to the deal is

[00:16:27] gonna get done and i mean they were right on both sides and the other example that comes to mind

[00:16:33] and one that i know you were pretty vocal about is Nikola which ended up being a fraud so the car

[00:16:39] the EV truck company complete fraud and i think the seal was even charged for fraud right Trevor

[00:16:46] and Milton was it yeah i think i think you're right yeah yeah and there's also the uh Indian

[00:16:52] conglomerate adonni which has definitely recovered but uh had a sharp draw after the short

[00:16:59] rapport that was released by hindenburg research but those are just some example can i take credit

[00:17:04] i was psychologically short adonni before hindenburg was so i don't know i'll talk that up

[00:17:13] as a baby sounds good i didn't make any money from it but you know i get to brag on the podcast

[00:17:21] no exactly and now like what's equinix so for those are not familiar the ticker is EQIX so equinix

[00:17:28] is the largest data center read in the world it has over 260 facilities worldwide equinix is a

[00:17:36] read meaning that it's a real estate investment trust it's just a structure um that is very specific

[00:17:43] to real estate it has a market cap of approximately 75 billion which is down from the 80 billion when

[00:17:49] the short report was released and the stock has been doing quite well in recent years especially

[00:17:55] benefiting from all the AI hype so what did the short reports say well there's three main things

[00:18:02] and we will go into detail with you know each of those concerns raised by the short report

[00:18:08] there's actually four parts but i found that there was like two in one so i kind of put them

[00:18:13] together uh the first one is the accounting issues so equinix manipulates uh AFFO a key profitability

[00:18:21] metric for reads and i will explain what AFFO is number two they are overselling power

[00:18:28] and number three equinix is being disrupted by large cloud providers such as microsoft google amazon

[00:18:35] also known as hyperscalers anything you want to add before i get started on the fun accounting

[00:18:41] stuff no i think that that's right you'll cover the first two all chime in on the second one

[00:18:47] you'll talk about the accounting issues for me the third one is the most of substance in terms

[00:18:54] of issues with the actual business and i've talked to a friend about this i'm like okay if they're

[00:19:01] right about the accounting and they're right about the power sure but if they're right on the right

[00:19:07] side of the trade it's because they were actually right about the disruption from cloud yeah no i

[00:19:12] would agree with that and for me the accounting where maybe the number one in two points where i

[00:19:17] have an issue is it erodes my trust in management and i think that is a big big thing if i

[00:19:25] if i have a company where i can't trust what management is saying then what the hell am i doing

[00:19:30] owning that company so that's kind of how i see things and then you add on to the fact the the

[00:19:35] potential disruptions as well for hyperscalers now if you're new to reads that's okay like i'm

[00:19:42] mentioned i'll do a quick explanation of what it is so net income or net profits are not great

[00:19:47] profitability metrics for reats i real estate investment trust so get used to that term i'll be

[00:19:53] saying it a lot because they don't provide a good picture of the recurring castle that's

[00:19:58] generated by these businesses that's because net income includes the pre-eation and

[00:20:03] amortization which are non cash items free cash flow also has its limitation because it lumps in

[00:20:10] all capital expenditures together and doesn't separate between what's called maintenance capital

[00:20:16] expenditure so what's used to just maintain your current assets and make sure they function

[00:20:21] properly and grow capital expenditures which are used to grow the business and essentially you know

[00:20:28] grow the business cash flow AFFO so adjusted funds from operation is supposed to take care of this

[00:20:36] so you take net income and you remove the impacts of depreciation and amortization since they are

[00:20:42] non cash item you then factor in maintenance capital expenditure which is called maintenance

[00:20:48] cap ex to have a better picture of the actual cash generated by the read so there's a couple of

[00:20:54] other items that they adjust for but that's a general sense of it and one AFFO is a really useful

[00:21:02] but one of the issues that's being highlighted here and one of the issues using this metric is it's a

[00:21:10] non gap metric so it's a non standardized metric it is very useful for reads but the problem is

[00:21:17] is that it's not always used as consistently or calculated the same way from read 8 to read b

[00:21:25] and this is one of the things that hindenburg research is alleging anything you want to add

[00:21:31] there before I keep going so essentially to treat it for the listeners they are overstating

[00:21:39] they believe they are overstating adjusted funds from operation that just it funds from operation

[00:21:46] yeah that's correct so that's insured what they're saying so essentially into in

[00:21:53] burg research is saying that in 2015 when equinix converted to a read structure because they were

[00:21:59] not before that they had a significant drop it maintenance cap ex as a percentage of the revenue

[00:22:06] so you just take the maintenance cap ex and you divided by the percentage of revenue

[00:22:12] in their report they mentioned that it went from being in the 8 to 9 percent range in 2013 and

[00:22:18] 2014 and then went to slightly above 4 percent in 2015 so a drop by half I wasn't able to verify

[00:22:26] that specific thing from the 2013 and 2014 numbers because equinix wasn't reporting in the same

[00:22:32] way and when I looked at the 2015 numbers they were using you know the comms from previous year with

[00:22:39] the AFFO but I think they just calculated it the same way so that part I wasn't able to verify

[00:22:45] however I was able to verify that maintenance cap ex is now down to 2.66 percent for equinix

[00:22:54] as a percentage of its revenues compared to 6 percent for digital realty which is their main

[00:23:01] pure play competitor there are other competitors like American tower read but American tower read

[00:23:07] also has these like cell phone towers so it's not the best comparator in my opinion but the fact

[00:23:13] that it's more than half the maintenance cap ex of their main competitor is definitely a big

[00:23:20] red flag for me I felt we're like 4.5 percent I think you can definitely make the case that

[00:23:26] you know they're just better managed I think that makes a lot of sense but to have such a discrepancy

[00:23:32] is definitely a red flag and the fact that it has steadily gone down as well despite inflation being

[00:23:39] significantly higher in the last few years I just find that hard to believe it's literally gone

[00:23:45] from more than 4 percent in 2015 to 2.66 percent and if it was still around the 4 percent mark like I

[00:23:52] said maybe I think it'd be easier to give them the benefit of the doubt when comparing to digital

[00:23:58] realty trust but I don't know to me that screams too good to be true and they said that equinix

[00:24:05] categorizes tons of maintenance expenses as growth cap ex to make their numbers look better

[00:24:10] better former employees even mention and obviously we can't verify this but that things like new

[00:24:17] light bulbs were classified as growth cap ex so yeah I mean if that's true then that's borderline

[00:24:26] I mean I don't know if you'd call that fraud but it's pretty close to it just kind of

[00:24:31] it's a non-gap number right so that's yeah that there's no so maybe we should back up a little bit

[00:24:39] and explain this so non-gap number just means that it's outside of the generally accepted accounting

[00:24:47] principles and it's not a standardized metric and then a lot of these companies will use adjusted on

[00:24:56] non-gap numbers which is now like adjusted adjusted it's basically like you grab a bunch of spinach

[00:25:03] okay and you put it in the pan and that's that's the adjusted number after the pan cooks the spinach

[00:25:10] for 10 minutes and it shrinks till tiny little bit that might be the true gap number and so

[00:25:16] that's like an easy analogy to think about like there's ways to manipulate it but there's ways

[00:25:23] to manipulate it without any sort of criticism or any regulation because everyone knows hey you

[00:25:33] can't criticize my number because we all know it's made up anyways right like that's that's

[00:25:37] kind of the one of the structural problems with that's right yeah maybe I'll take that back

[00:25:41] it's not fraud but definitely misleading investors I think that is at the very least what they're saying

[00:25:47] and also just add to what you're saying gap so gap is for American businesses so it's for US

[00:25:53] businesses so rest of the world typically it'll be IFRS so international financial reporting standards

[00:26:00] I think is the the full term so if you ever see non IFRS or non-gap these are non kind of

[00:26:07] more accepted or what's typically accepted by regulators but again it's not to say that AFF

[00:26:13] is not useful for a read it is useful but it has to you have to make sure they calculated

[00:26:20] properly and it's not always easy to figure out whether they do or not and I think that's what

[00:26:25] they're showing here and the other way they are boosting AFF OS by allocating operating expenses

[00:26:31] to CAPEX and not the maintenance CAPEX that I just talked about the reason they say Equinix is

[00:26:37] doing this is because a big part of their executive compensation is tied to FFO and revenues

[00:26:44] and there is clarity the incentive for them to do that to boost the FFO they actually reduced

[00:26:50] those maintenance CAPEX the numbers look better they hit their targets they get paid

[00:26:55] and the last part is definitely true in terms of their incentives I looked at their proxy statement

[00:27:02] it is all tied to AFF when revenues so there is clearly incentive from executives here to make

[00:27:09] those numbers look better this is the part that actually feels like the the smoking gun in the

[00:27:17] report is this is like okay sure there's this made up number and we made made up adjustments

[00:27:25] this made up number but your comp package being tied to it that's where when they're smoked there's

[00:27:31] fire right that's when there's actual incentive to act a certain way if it wasn't that way then

[00:27:38] everyone like okay who cares it's made up number anyways but when there is actual compensation structures

[00:27:46] tied to the management and that's how they're judged on management performance show me the

[00:27:51] incentive and I'll show you the outcome yeah now exactly so that's kind of an overview here of

[00:27:58] what the they're alleging in terms of the accounting shenanigans are misleading whatever you want to

[00:28:04] call it now number two they are overselling power so they're alleging that they're overselling power

[00:28:12] capacity and the hopes that customers will not use it all and essentially they're saying they're

[00:28:18] misleading investor by saying that cabinet space use is 79% across all regions when in reality

[00:28:25] there are severe power constraint which are different than cabinet space because these are not

[00:28:31] the same thing so you know cabinet space that is available is completely different than the power

[00:28:37] available to power whichever computer or server that's within those cabinet but they're not

[00:28:44] disclosing the power to utilization across their data center which of course that is

[00:28:49] cause for concern and if customers start using the power they've contracted equinix could be

[00:28:56] at serious risk of an outage which would be a massive problem for its reputation and business

[00:29:02] obviously if customers with equinix and power goes out it affects their business and I can guarantee

[00:29:09] there would be some very unhappy customers and there's really what they're also saying is there

[00:29:14] some real risk here especially as AI puts a lot of demand on energy I mean we've seen it within video

[00:29:21] and the build up of hyperscalers like it's literally like it's these are power hungry machines

[00:29:28] so it could create a big problem in terms of equinix and the potential for outages going forward

[00:29:34] hasn't happened yet but they're saying it's a real risk and they've talked to executives as well

[00:29:40] former executives that say essentially they've been doing this for years I've been able to get

[00:29:46] away with it but again going forward who knows what will happen from that standpoint but it also

[00:29:51] shows that there's less potential for growth if this is in fact true yeah with the power situation

[00:29:59] I don't know all the inner workings of how networking actually works and I suspect with the

[00:30:08] the infrastructure and the hardware coming into these racks now are a lot more power hungry

[00:30:13] especially because of how these GPUs perform so I think that that's I think that that's all

[00:30:19] probably fair I just don't think that it's not fixable like unless these data centers on the end

[00:30:27] of lines and they're actually going to need to build like code generation on top of it and there's

[00:30:31] going to be some lag lead time like this is this is fixable so this is one where it's like okay there

[00:30:37] might be some short term issues if they're overselling power and they're gonna have a huge gap

[00:30:43] of what's actually required for the customers I look at that as maybe a short term concern

[00:30:50] yeah I mean and also they're relying a lot on you know interviews they've done with former

[00:30:55] employee so this is not as verifiable and I think one of the big things they're alleging is they're

[00:31:00] misleading investors with a potential growth or if like you're saying there is some potential for

[00:31:06] more power to be delivered there well how much does that actually increase the cost for equinix

[00:31:12] of impact profitability so there are some ripple effects but this was probably the weakest point

[00:31:18] of the short report in my opinion just because it's it's harder to verify I mean I'm not saying

[00:31:23] it's wrong or correct but to me that the two kind of smoking gun was the accounting issues if

[00:31:31] you like that they're raising but also the potential disruption from the hyper scalers that you

[00:31:37] will be talking about just now yeah so I guess we can talk about that now accounting sure okay

[00:31:45] the second point sure okay I looked through them and that's not really a concern for me in terms

[00:31:53] of like I need to sell the stock right right now I think that adjusted adjusted adjusted funds

[00:32:00] from operations whoa shocking that you know they're spending some fungling I don't think really

[00:32:06] anyone's too super shocked as soon as you have an adjusted adjusted number however as an investor

[00:32:13] I care about the long term prospects of this business so to give people a little bit more context about

[00:32:23] equinix is they sell space power and heat and interconnectivity and I'm going to talk about what

[00:32:31] that means so they operate today 260 data centers all around the world and that can give a lot of

[00:32:38] these larger enterprises data space racks on servers all around the world and the ability to

[00:32:46] interconnect to their customers physically with with with fiber wires right on prem all around the

[00:32:53] world with a huge footprint with 260 data centers and every continent right and so that's a really

[00:33:00] appealing thing for large enterprises and it's been an extremely appealing proposition

[00:33:08] for equinix for the last 20 years it's been an incredibly good stock it's been a really good

[00:33:15] business and even as cloud came on and people are going off prem so instead of owning all that

[00:33:23] server space on their own managed data centers what they'll do is they'll co-locate in a third party

[00:33:33] place in this case a real estate company like equinix that will sell you rack space

[00:33:39] now the big benefit of that the real crown jewel of my equinix thesis when I bought it two three

[00:33:46] years ago when interconnection growth was still 15% quarter over quarter the gravy chain was rolling

[00:33:54] okay something's changed and I'm going to explain what that is the crown jewel of this business has

[00:33:59] been interconnection because that is true network effects so Simone it's a lot more appealing

[00:34:07] to house my equipment and my network equipment with an equinix over a competitor because they're

[00:34:14] the largest and because I'm going to easily be able to interconnect with my partners my vendors

[00:34:20] my customers in a B2B relationship type way with literal wiring to and from our servers and their

[00:34:27] servers on the sir like on the location that equinix offers that's amazing it gives me exactly what

[00:34:34] I need and secure data transfer between those companies that's what's been the crown jewel of

[00:34:40] equinix and created a real network effect equinix is like the longest I think it's 80 straight

[00:34:47] quarters 82 straight quarters of revenue growth it's the longest streak of revenue growth of any

[00:34:53] single S&P 500 company so this has been a growth business okay what hindenburg is pointing at

[00:35:01] is something that I pointed at basically three quarters after owning the stock is cloud providers

[00:35:10] the hyper scalers like amazon google and microsoft are allowing direct interconnection over

[00:35:20] the cloud and on their locations because those hyper scalers have their own data centers that they

[00:35:28] own and manage and operate there's huge catbacks items on these big tech companies you can bypass

[00:35:37] the need for co-location and interconnection co-location just means small you have a company I have

[00:35:43] a company we're both going to co-locate in an equinix third party data center now I can bypass that

[00:35:49] over the cloud with direct connects AWS calls it site link I forget what the other ones call it but

[00:35:54] this is this is very common yeah I think it launched in 2021 I think for AWS yeah that's right and

[00:36:00] and equinix has tried to counter that with two products called fabric and scale scale yeah they haven't

[00:36:09] had a whole lot of traction because I mean why would you when you can do it cheaper and faster

[00:36:15] with one of the big tech and a lot cheaper too not to mention any startup can get like three hundred

[00:36:23] thousand dollars with the credits like cloud credits right out of the gate with these because they're

[00:36:27] trying to win business from each other as well so this commoditization and pricing so that's

[00:36:33] one thing happening the other issue is cloud native w a n s which means content delivery networks

[00:36:46] like cloud flare they mentioned a couple other competitors I don't know any of the ones we use

[00:36:51] cloud flare it's epic cloud flare is epic it's so good and it's so cheap like it's unbelievable

[00:36:59] like this is absolute they're just grabbing market share left grade center so there's becoming less

[00:37:04] and less of a need for large enterprises companies building hybrid clouds companies mega companies

[00:37:14] like even exchanges to use third parties like equinix and startups like us who will be the companies

[00:37:20] of tomorrow can bypass that with hyper scalers Google Amazon Microsoft and then the use of these

[00:37:29] content delivery networks like cloud flare so this is the serious concern because the crown jewel

[00:37:38] of interconnection is being bypassed and hyper scalers are paying nothing for cross connects between

[00:37:47] these so interconnections which we track on Finch at you can go on equinix go on the KPIs

[00:37:53] equinix was growing interconnections at like double digits and then it dropped down to high single

[00:38:01] digits the last four quarters have been 5.6 percent 4.7 percent 3.9 percent and 3.4 percent so

[00:38:09] it is declining steady to low single digit growth on interconnections so net of churn this

[00:38:20] business is not what it used to be and the reason that I bought the stock was because there's an

[00:38:27] actual network effect in networking like that's not meant to be a pun there's an actual network

[00:38:35] in the cross connects and networking and interconnection there was an advantage to co-location

[00:38:41] tech is changing tech changes fast man especially at the this huge infrastructure level when you're

[00:38:48] playing with the big dogs and so what used to be looked at as a boom with AI and everyone moving

[00:38:58] to the cloud that was a boom and now it's being bypassed in the last like three four years

[00:39:06] and that's a concern for I guess the next 10 years of equinix I bought this stock because of

[00:39:16] interconnection growth and it's basically trending to zero on that on that top line so that's

[00:39:24] the major concern to counteract that's you know this company is still growing there's still a need

[00:39:32] for what they do there's still a great product market fit for what they do but a large part of their

[00:39:40] business is going to not be needed and bypassed and that's a concern to counteract that decision

[00:39:48] discussion I mean they don't they have basically two billion here in an ARR every single quarter so

[00:39:55] like six and a half billion in ARR no like eight billionation run rate next year it's still a

[00:40:04] solid business it's still growing really fast the the valuations getting a little bit more

[00:40:09] enticing but you have to counteract that with is the business getting structurally worse and I think

[00:40:15] the answer to that is yes yeah and I think you broke it down well I mean for me it's funny maybe

[00:40:21] it shows like what we kind of focus on a bit more for me it's the accounting red flags and then

[00:40:27] added what you just said in terms of where the business is going and the reason why I get back

[00:40:33] to the accounting is reads are prey usually reads trade as a multiple of FFF funds of up for funds

[00:40:41] from operation or AFF and one thing that this short report has showed me and of course it's

[00:40:48] suggested metrics and I know all of that but I'll still come back to the discrepancy between their

[00:40:55] AFF and DLRs AFF and that's where it really for me that's where the red flags are especially when

[00:41:04] then you factor in how management or how executives are compensated it really raises a lot of question

[00:41:11] and I do think there's a big risk for the business to see the multiples that are trading on

[00:41:16] go significant lower I don't think it's a zero by any stretch of imagination they're not saying that

[00:41:21] it's a zero in the short report either they're just saying that it's overvalued for the most part

[00:41:26] because of the reasons we just outlined in future growth over selling power and the accounting

[00:41:31] issues so me when I take all of these together and especially the accounting issues because I was

[00:41:38] able to verify a whole lot what they're saying with my own eyes going into the financial report

[00:41:43] that's where it has me definitely concern about at the very least evaluation right now and

[00:41:49] that it could be right for a significant pullback I think it's the most highly valued

[00:41:59] player that's for sure in this case because network effect really matter in this business co-location

[00:42:07] and interconnection really really matter and the market rewarded that like bigger is better when it comes

[00:42:13] to these infrastructure companies there's there's just no doubt of that and if growth starts to really

[00:42:21] slow down like the writings kind of on the wall here in the last six quarters that that is clearly

[00:42:28] happening it's easy to look at the revenue in the top line and FFO just funds for reparations

[00:42:35] and go yeah it's still up into the right which it is it is this is why I focus on the metrics that

[00:42:43] I actually care about like I bought the stock for interconnection growth companies like you know

[00:42:50] cross-in wires literally between I run a company we're gonna connect to have secure data transfer

[00:42:55] I'm a telco you're uh whatever that stalling out big time and so what they're saying is clearly

[00:43:04] happening in the document yeah in the in the data so that's where I get a little concerned all right

[00:43:10] so so to wrap this up what are you doing uh you are we're a shareholder what are you doing

[00:43:16] I sold it all oh damn yeah I mean I look I don't know where the stock will go for it it could very

[00:43:23] well go higher especially if there continues to be a lot of hype around AI but um I said it I

[00:43:29] think I alluded it early on when I was talking about the accounting section it just unfortunately

[00:43:35] it just erodes my trust into the executives and I can't hold the business where I don't trust what

[00:43:42] they're saying and there's enough red flags to you know maybe they're doing things correctly but

[00:43:50] when I look at the numbers there's just something that doesn't make sense and you know obviously

[00:43:56] they did some interviews and that I can't validate but just based on the numbers that's what really

[00:44:01] I find really concerning and then when I looked at the kind of future of the business and the

[00:44:07] interconnection and yes they had like a really good product if you went back a few years before

[00:44:14] you know all the big cloud providers started coming out with some solution you know to compete against

[00:44:19] that when you add everything in I just don't I don't have the conviction to hold them hold

[00:44:25] that clinics going forward I'm just looking analysts are guiding for pretty steady like

[00:44:33] it looks like they just typed in 9% growth from the top line and they're Excel spreadsheet

[00:44:38] and called it today that's what almost every analyst model looks like on Fincher consensus because

[00:44:45] that's what the company usually guides for 9 to 15% I think they're the latest one they said

[00:44:50] they're going to do nine they'll probably do nine just based on pricing power and a little bit of

[00:44:55] growth that you see organically plus new data center openings but new data center openings

[00:45:01] are going down and our connections are going down these are things I noticed right after I bought

[00:45:07] the stock so I bought the stock it is now my lowest position by far because I never ever bought

[00:45:15] a single share instead I bought all the hyper scalers I mean I for me it was a decent position I

[00:45:21] bought it like quite a while ago so it ended up like returning pretty close to what the SMP 500

[00:45:27] return during that time period for me so it was definitely a good investment and I guess the

[00:45:33] last thing I want to finish on and I don't know about you I'm a bit passionate for this but

[00:45:38] it pisses me off when I hear like CEOs and Elon Musk has been vocal about that like trash talking

[00:45:45] short sellers yeah clearly I think it's so stupid but again I think there are some really

[00:45:52] the same year one oh yeah yeah like what what did he say they're trying to like use like the money

[00:45:59] to go buy coke or something yeah he's like weird like he yeah okay first of all Alex Carpice is

[00:46:06] just get this guy creeps me out he goes and it's not cool to see what's that and I'm like it's

[00:46:14] not coke a cola like I literally said that on the interview yeah he's like these cocaine addicts

[00:46:20] like there's on CNBC they're short and stock just like can make their money to buy their coke

[00:46:25] and he's on CNBC and he's just an absolute lunatic this guy dude red flag not the coke thing

[00:46:32] just how angry and against short sellers you are nothing screams you have something to hide

[00:46:39] like being scared of short sellers I can't think of a bigger red flag than CEOs hating on being

[00:46:47] scared of calling out short sellers ding ding ding red flag it's like what do you have to hide

[00:46:53] one two why do you care three short sellers make a very healthy part of the market especially a

[00:47:02] Hindenburg that calls out BS this one they're not calling out fraud they're basically saying look

[00:47:09] they the business is overvalued I think that they're gonna have a rough couple a couple years

[00:47:14] but they've had a pretty good tracker heard of calling out just blatant frauds which I appreciate

[00:47:19] I like Hindenburg research I think they do a good job this is a very valuable part of the ecosystem

[00:47:26] to have people calling out trash because there's a lot of trash out there and if these guys want

[00:47:32] to make money by calling out the trash and putting their money where their mouth is good for them

[00:47:38] and my view of very healthy part of the market I know Palantir has a very passionate shareholder

[00:47:45] but if your CEO is very anti short sellers you have to ask yourself what is the man hiding

[00:47:52] yeah yeah and I mean look there are some shady characters in short selling that's for sure like

[00:47:58] I'm not gonna you know say that that's not true but there are some reputable firms or reputable

[00:48:04] people that do really good work and identify frauds identify I mean in this case I wouldn't say it's

[00:48:11] fraud but I think it's more like you know issues with the business I would say I think some significant

[00:48:17] issues with the business I think it's helping issues that are overlooked by the multiple exactly

[00:48:23] and I think that's a great thing obviously as a shareholder honestly I'm happy that day

[00:48:29] while former shareholder that day raised those issues and sometimes I mean it's gonna be overblown

[00:48:35] it's not gonna be really that useful but I think it's a good counterbalance because you know as well

[00:48:41] as I do and you don't need to look very far you can just look at the TSX venture I mean there are

[00:48:48] some publicly listed companies there's probably tons of them that are a borderline like either misleading

[00:48:54] flaglantly misleading investors insider trading and not getting caught or outright doing fraud

[00:49:03] that you hopefully short sellers will uncover because of their work so I think it's just

[00:49:09] when I hear CEOs or people of prominence kind of bashing short seller and just painting them

[00:49:16] of the same paintbrush I have some big issues with that is our boy face drive still well that's

[00:49:22] yeah that's a face drive or steer now steer oh yeah yeah so we you can go back I think it was what in

[00:49:30] what was it in early 2021 I think that we really did a bit of a deep dive so I use face drive as a

[00:49:38] barometer for how overbought or how let's just say the hype in the market in general yeah it's a

[00:49:48] pretty good bell it's good proxy for junk in the market and people willing to throw money at stuff

[00:49:56] that literally there's no business behind this thing yeah god what a what a piece of shit this

[00:50:03] stock is yeah you know what like the people who call the sell and make it their life mission to

[00:50:10] protect investors against fraud they should make they should get compensated especially if they're

[00:50:14] willing to put their money with where their mouth is with this stuff and the right they should

[00:50:19] get compensated that's that is what makes the market a market there's two sides of every trade

[00:50:29] and there is people who should be compensated for being right correct over and over again

[00:50:36] and so I thought this was an interesting conversation because you know you were you were a shareholder

[00:50:41] I am a shareholder if I do something in exit the position it's not because of this short report

[00:50:47] I mean I've been very vocal about my view on the hyper-scaler market it would be because

[00:50:53] I don't plan on adding to fresh capital and it will become such a small part of my portfolio

[00:51:03] that it's like I just cut things that are less than half a percent anything that's less than

[00:51:08] half a percent they're not a core position and they're no longer a workbench position either I just

[00:51:14] I just got them because there's not a focus yeah that's fair I mean for me I think more of

[00:51:21] I think the downside risk is higher than the upside for aquinics and it was a big enough position

[00:51:26] that that's essentially ultimately that's the calculus I made after reading the short report

[00:51:32] doing my own research validating the information and then I took the decision to do that

[00:51:37] and the last thing I'll add here is for people want to see how like short sellers can be very

[00:51:44] useful if you have Netflix look up the China hustle very good documentary that uncovered

[00:51:51] frauds that were going on in China literally businesses like that had like almost zero revenue

[00:51:57] that we're trading for billions of dollars in the early 2010s because on US exchanges

[00:52:02] on US exchanges because people were kind of I guess snake bit by the you know the great financials

[00:52:09] doing the on no one was doing the on the ground boots on the ground research until these guys showed up

[00:52:15] at the place of residents that they say their businesses yeah and found that the hiding and filming

[00:52:20] at the same time yeah yeah so that that's a good example like this that is actually yeah and at

[00:52:28] the time I mean I think it was just a hype of you know the China story right the Chinese growth

[00:52:33] and making money on China and so on so I would definitely encourage people I know dirty money has

[00:52:39] a couple of short selling example episodes in there I think valiant pharmaceutical was one of the

[00:52:46] big ones that that girl that shorted them she was really smart I think she has another short going

[00:52:51] on right now I can't remember a name but I think it was like yeah I can't remember a name but you

[00:52:57] know which one I'm talking about right yeah the dirty money ones are good those are solid the

[00:53:04] what is it to one with a acumen he does herb life yeah yeah yeah he's that didn't go too well

[00:53:11] though but he was right he was he was right just the timing is wrong this is the risk this is

[00:53:17] another risk that short sellers take on that doesn't get enough credit to they can be right for a long

[00:53:22] time and get waxed like bill acumen did with herb life calling yeah calling that junk out yeah because

[00:53:29] we didn't go we didn't go into the into the details of short selling but essentially one of the things

[00:53:36] is you borrow shares so you actually have to like there's a carry cost to the having the trade on so

[00:53:42] you can't hold them forever and then if the share price keeps going up then your loss is mount

[00:53:47] and mount and mount and at some point you have to cover your short position if you don't want to

[00:53:53] go bankrupt or risk going bankrupt so that's essentially the risk behind short selling thanks for

[00:54:00] listening to the podcast folks we really appreciate you we are here Mondays and Thursdays the show

[00:54:07] goes on you can see our faces for radio recording on the podcast here at join tci.com it's $9

[00:54:15] and a month not only do you get that but you're going to monthly portfolio updates which this will

[00:54:20] come out with a brand new fresh one you can see I mean you're gonna have some shakeups in your

[00:54:26] portfolio I think there's a pretty large position though yeah so yeah so there you go and

[00:54:34] you get myself you get Dan you get Simone in a little spreadsheet I know

[00:54:39] got a couple hundred people following along at this point right you know yeah yeah that point yeah

[00:54:44] cool yeah it's a good deal and we post the videos obviously yeah yeah faces faces for radio

[00:54:51] that's right I get my like double chin angle here because I had this beautiful

[00:54:58] setup with my camera connect I bought this thing that connects my phone it's like 1080p or

[00:55:05] and it worked so great for like four recordings and I haven't got it to work since I didn't do

[00:55:10] anything I didn't change anything oh man I thought I'll trade you my single chin for your hair

[00:55:20] done done deal trade complete there's always there's just

[00:55:25] so winner and loser and every trade I don't know which one I'm winning a limiting or losing

[00:55:29] thanks for listening we'll see you a few days take care but wait the Canadian investor podcast

[00:55:33] should not be construed as investment or financial advice the host and guest featured

[00:55:39] may own securities or assets discussed on this podcast always do your own due diligence

[00:55:45] or consult with a financial professional before making any financial or investment decisions