On Wednesday, Hindenburg Research revealed they have taken a short position in Equinix (NASDAQ:EQIX), criticizing the data center operator for its high valuation, and alleged overstatement of a crucial profitability measure.
In addition, the short seller also highlighted that EQIX faces intense competition from major cloud companies, including Amazon (NASDAQ:AMZN).
Equinix shares fell 2% at the market open.
Hindenburg, known for its reports targeting corporations like India's Adani Group, accused Equinix of using an "accounting trick" to inflate its adjusted funds from operations (AFFO) by wrongly categorizing maintenance capital expenditures as growth investments to appear more profitable.
The firm said that former employees and executives at Equinix disclosed that the directive to misclassify capital expenditures came "from top management."
This misclassification has artificially increased the firm's AFFO by $3 billion since 2015, Hindenburg’s report alleges.
“We estimate that Equinix’s manipulation of maintenance CapEx has resulted in a cumulative $3 billion boost to reported AFFO since 2015, Hindenburg wrote.
“Equinix’s questionable AFFO accounting has contributed to an estimated $295.8 million in stock award grants to top executives who have personally benefited from these accounting games,” it added.
“Beyond accounting, Equinix has relied on a risky approach to growing revenue: overselling power capacity in the hope that customers won’t use all the power they’ve contracted for. A former executive told us it is “the dirty secret”, stretching Equinix’s infrastructure to the limit.”