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Artificial intelligence’s (AI) increasing presence across sectors is creating a strong demand for data center upgrades. Faster processing, higher capacity, and efficient power management are essential to support AI applications, with ongoing algorithm and hardware advancements driving the development of specialized AI data centers.
AI workloads fuel explosive demand for data center capacity, especially in training and inference. That’s driving innovation in data center design and high-powered cooling solutions. The global data center market is expected to skyrocket to a massive $624.1 billion by 2029, growing at an 8.5% compound annual growth rate (CAGR) from 2024 to 2029.
For investors looking to tap into this growth, HSBC Global Research recently noted that AI-driven demand has outpaced data center supply throughout 2024, yet data center stocks Equinix, Inc. (EQIX) and Digital Realty Trust, Inc. (DLR), have underperformed the broader market due to company-specific issues. However, as their operational challenges ease, HSBC believes these two names are poised for strong momentum into 2025. Here’s a closer look at these data center stocks.
Data Center Stock #1: Equinix
Equinix, Inc. (EQIX), headquartered in Redwood City, California, operates as a real estate investment trust (REIT) and bills itself as the world's digital infrastructure company. With a market cap of around $82.5 billion, the company invests in interconnected data centers. Equinix focuses on developing network and cloud-neutral data center platforms for cloud and information technology, enterprises, network, and mobile services providers, as well as for financial companies.
Shares of EQIX have gained 20.2% over the past year and 8% on a YTD basis, underperforming the broader S&P 500 Index’s ($SPX) returns of 32.2% over the past year and 19.4% on a YTD basis.
On Sept. 18, Equinix paid a quarterly dividend of $4.26 per share to its shareholders. The company’s annualized $17.04 per share payout translates to a 1.94% dividend yield. Furthermore, the company has a respectable eight-year streak of consecutive dividend hikes, underscoring its dedication to rewarding shareholders.
Equinix lifted the curtains on its Q2 earnings results after the close on Aug. 7, which topped Wall Street’s bottom line estimates, triggering a 3.7% surge in its shares the next day. Its adjusted funds from operations (AFFO) of $9.22 per share jumped 14.7% year over year, crushing Wall Street’s forecasts, while the company’s revenue of $2.2 billion climbed 7% annually to match estimates.
The company achieved record gross bookings and continued momentum with xScale offerings, marking the 86th consecutive quarter of revenue growth. Its first multi-hundred-megawatt xScale campus in Atlanta was completed to support cloud and AI workloads.
Additionally, during the quarter, Equinix announced its plans to enter the Philippines market by acquiring three data centers from Total Information Management for approximately $180 million. This acquisition expands capacity and allows over 1,000 cabinets for future development in the region.
For fiscal 2024, management anticipates revenue to range between $8.69 billion and $8.77 billion, indicating a 6% to 7% year-over-year increase, while AFFO is projected to land between $34.67 per share and $35.30 per share. Additionally, adjusted EBITDA for the entire year is forecasted to range between $4.07 and $4.13 billion, with a 47% margin.
On Oct. 4, Equinix closed up marginally following its upgrade to “Buy” at HSBC. The analysts also assigned a higher price target of $1,000, up from $865. The upgrade was driven by expectations of improved operational momentum, projected 10% revenue growth in 2025, contributions from the xScale JV to AFFO, and the positive impact of AI moving into the inferencing phase. Analysts also highlighted Equinix's exposure to stable-priced retail verticals and its attractive valuation as key factors behind the upgrade.
Overall, Wall Street is highly bullish, with a consensus “Strong Buy” rating for EQIX. Of the 26 analysts covering the stock, 20 advise a “Strong Buy,” one suggests a “Moderate Buy,” and the remaining five advocate a “Hold.”
The mean price target of $922.96 represents a 6% premium to EQIX’s current price levels. The Street-high price target of $1042 suggests an upside potential of 19.7%.
Data Center Stock #2: Digital Realty Trust
Austin-based Digital Realty Trust, Inc. (DLR) brings companies and data together by delivering the full spectrum of data center, colocation, and interconnection solutions. With a market cap of around $48.8 billion, the company's properties contain applications and operations critical to the day-to-day operations of technology industry tenants and corporate enterprise data center tenants.
Shares of this digital REIT have gained 33.3% over the past 52 weeks and 16.3% on a YTD basis.
On Sept. 30, the company paid a quarterly dividend of $1.22 per common share. This brings its annualized dividend to $4.88 per share, offering a solid dividend yield of 3.11%.
On July 25, Digital Realty reported its Q2 earnings results, which revealed a mixed picture. Its core funds from operations of $1.65 exceeded Wall Street’s estimates of $1.63, while revenue of $1.36 billion fell short of the expected $1.38 billion. During the quarter, Digital Realty not only signed new leases but also renewed leases totaling $215 million in annualized cash rental revenue.
Moreover, the company nearly doubled its cash reserves in Q2, rising to $2.3 billion from $1.2 billion recorded at the end of March 2024. As of June 30, the company held $16.3 billion in total debt, mostly unsecured, and maintained a strong financial position with a net debt-to-adjusted EBITDA ratio of 5.3x and a fixed charge coverage ratio of 4.1x, showcasing its disciplined financial management.
CEO Andy Power noted, “We have returned our balance sheet to below-target leverage levels and broadened our capital sources to capitalize on the global opportunity we see for data center infrastructure.”
For fiscal 2024, management forecasts total revenue between $5.6 billion and $5.7 billion, while adjusted EBITDA is anticipated to land between $2.8 billion and $2.9 billion. Additionally, the company expects core FFO per share for the entire year to range between $6.60 and $6.75.
Analysts tracking DLR project the company’s profit to reach $6.65 per share in fiscal 2024, and grow another 6.5% to $7.08 per share in fiscal 2025.
On Oct. 4, analysts at HSBC upgraded their recommendation on DLR stock to “Hold” from “Reduce” and set a price target of $160, citing a positive pricing environment in the coming years, consistent AFFO growth, and potential for increased bookings from AI.
The picture on Wall Street appears reasonably bullish, with a consensus “Moderate Buy” rating for DLR stock. Out of the 25 analysts offering recommendations for the stock, 14 advise a “Strong Buy,” one suggests a “Moderate Buy,” nine maintain a “Hold,” and one recommends a “Strong Sell.”
The stock is already trading close to its mean price target of $160.87, while the Street-high price target of $188 suggests an upside potential of 20.1%.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
