Equinix (NASDAQ:EQIX) reported solid Q4 results, modestly ahead of the Street and management’s guidance. Based on recurring FCF estimates, the market is already pricing in a favorable REIT conversion ruling, with shares trading at a modest premium to other REITs. Moreover, if the company does not receive a positive ruling, analysts see significant downside in the shares, as the stock would likely trade in line with the non-REIT data center group.

Equinix reported revenue of $564.7M, above the high-end of the guidance range, reflecting 11.6% y/y growth. Adjusted EBITDA of $263.5M (46.7% of rev) comfortably exceeded guidance of $255-259M. Equinix repurchased $49M of stock in the quarter, and has repurchased $92M of stock to-date.

Some metrics that REIT investors typically look for are not that appealing from an EQIX perspective. First, most REIT investors typically prefer the company own 100% of their land (EQIX owns 30-35%). Second, REIT investors typically prefer an average contract length of 10 years (EQIX has avg. length of 4 years). As such, even if Equinix receives a positive ruling and the valuation is not yet entirely reflected in the share price, we believe these factors will make EQIX less appealing to the prototypical REIT investor.

Based on our Recurring Free Cash Flow calculation, we believe shares of EQIX could fetch a valuation of roughly $200-210 (assuming 15x multiple), assuming they receive a positive ruling in their application for converting to a REIT. With shares trading nearly at this level already, we believe the market is already pricing in a positive ruling.