Key Points
- AI-driven demand for data center capacity continues to build and shows little signs of abating.
- Investing in REITs can be an interesting, not to mention lucrative, way of gaining exposure to the industry.
- Two REIT stocks, in particular, are set to continue outperforming the broader market this year.
- 5 stocks we like better than Digital Realty Trust
If there’s one industry that’s set to outgrow pretty much all others in the coming years, it’s data centers. At the start of last year, McKinsey said they were expecting demand to grow by at least 10% per year all the way through 2030. The advent of artificial intelligence (AI) in the months following, with its ever-increasing data requirements, will only drive this number higher.
Already, there are reports of large corporations finding it increasingly tough to get enough data center capacity, and there’s little sign of this pent-up demand abating. So for those of us on the sidelines wondering how to gain some exposure to the data center industry, where to start?
The real estate investment trust (REIT) model is an interesting one to consider, particularly for brick-and-mortar industries like data centers. While their shares trade on the market like normal public companies, a unique selling point of REITs is the revenue they generate from leasing fees and rent, 90% of which, by law, must be paid out to investors in the form of dividends. Here are two REITs in particular worth checking out.
Digital Realty is a REIT that owns and operates a portfolio of more than 300 data centers around the world. From their ever-increasing portfolio of in-demand data centers, Digital Realty generates income through leasing fees and rent, and these revenue streams are distributed directly to investors via dividends. A dividend yield of 3.5% will get most investors interested, especially when the underlying stock is performing strongly as well.
Digital Realty shares are up more than 60% since last May and show no signs of slowing down. And why would they? Their last quarterly report showed a record revenue print, while their earnings were up more than 200% year on year.
Looking ahead into the rest of 2024, expectations are high for this kind of growth to continue. Earlier this week, the team at Scotiabank upgraded their rating on Digital Realty, moving it up to Sector Outperform and giving it a price target of $157.
of the view that digital infrastructure investments hold a ton of upside right now, data centers in particular, and that the increased use of AI is only going to keep driving demand. Even with all the gains in recent months, Scotiabank’s price target on Digital Realty shares is still pointing to further appreciation of around 12%, while at the same time, investors are capturing those sweet dividends every quarter.
Like Digital Realty, Equinix also manages a large portfolio of data centers around the world, and its shares have been rallying, too. They’re up almost 70% since last summer, an impressive return for investors who are also capturing a dividend yield of 2.05% at the same time.
Earlier this month, the Truist team upped their rating on Equinix stock, noting their strong expectations for certain REITs to continue outperforming traditional equities as interest rates come down. Their $915 price target would see the stock rally a further 10% from where it closed on Wednesday, and were Equinix shares able to hit this in the coming weeks; they’d be trading at all-time highs.
Citi and Oppenheimer have also come out with bullish outlooks on Equinix in recent weeks, and investors should take confidence from that. The past year has seen record revenue prints, ever-improving margins, and increasing profitability. With the underlying demand for data centers only continuing to build, this is the kind of stock you want to be in.
Before you consider Digital Realty Trust, you'll want to hear this.
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