Key points
- Demand for AI-driven data center capacity continues to grow and shows little sign of abating.
- Investing in REITs can be an interesting, not to mention profitable, way to gain exposure to the industry.
- Two REIT stocks, in particular, will continue to outperform the broader market this year.
- 5 stocks we prefer to Digital Realty Trust
If there’s one industry that’s poised to outperform virtually all others in the coming years, it’s data centers. Early last year, McKinsey said it expected demand growth of at least 10% per year through 2030. The advent of artificial intelligence (AI) in the following months, with its ever-increasing data requirements , only increases this number.
There are already reports of large companies finding it increasingly difficult to obtain sufficient data center capacity, and there is little sign of this pent-up demand abating. So, for those of us on the sidelines wondering how to get some exposure in the data center industry, where to start?
The real estate investment trust (REIT) model is interesting to consider, particularly for physical sectors such as data centers. While their shares trade on the market like regular public companies, a unique selling point of REITs is the revenue they generate from leasing and rent payments, 90% of which, by law, must be paid to investors in the form of dividends. Here are two REITs in particular that are worth checking out.
Digital Realty is a REIT that owns and operates a portfolio of more than 300 data centers worldwide. From its ever-growing portfolio of in-demand data centers, Digital Realty generates revenue through lease and rental fees, and these revenue streams are distributed directly to investors via dividends. A 3.5% dividend yield will attract the interest of most investors, especially when the underlying stock is also performing well.
Digital Realty shares are up more than 60% since last May and show no signs of slowing down. And why should they? Their latest quarterly report showed record revenue, while their earnings increased by more than 200% year-over-year.
Looking ahead to the remainder of 2024, expectations are high for this type of growth to continue. Earlier this week, the Scotiabank team upgraded their rating on Digital Realty to Sector Outperform and gave it a $157 price target.
of the idea that investments in digital infrastructure have many benefits right now, particularly in data centers, and that the increased use of artificial intelligence will only continue to stimulate demand. Despite all the gains in recent months, Scotiabank’s price target on Digital Realty shares still points to further appreciation of around 12%, while at the same time investors are capturing those nice dividends every quarter.
Like Digital Realty, Equinix also operates a large portfolio of data centers around the world, and its shares are also recovering. They are up nearly 70% since last summer, an impressive return for investors who are also getting a 2.05% dividend yield at the same time.
Earlier this month, the Truist team raised its rating on Equinix stock, underscoring strong expectations that some REITs will continue to outperform traditional stocks as interest rates decline. Their $915 price target would see the stock rally an additional 10% from Wednesday’s close, and Equinix shares were on pace to reach this target in the coming weeks; they would trade at all-time highs.
Citi and Oppenheimer have also expressed bullish outlooks on Equinix in recent weeks, and investors should take confidence from that. Last year saw record revenues, steadily improving margins and growing profitability. With underlying demand for data centers continuing to grow, this is the type of stock you want to be in.
Before you consider Digital Realty Trust, you’ll want to hear this.
MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Digital Realty Trust wasn’t on the list.
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