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As artificial intelligence (AI) continues to upend industries worldwide, investors are making a beeline for stocks in the space. Heading into this next phase of AI development, ancillary bets on semiconductors and data center infrastructure plays are expected to be equally lucrative. Notably, data centers in particular are key for the development of AI platforms.
Data centers are crucial for AI because they provide the computational power and infrastructure needed to process and analyze vast amounts of data, which is essential for training and running AI models. These centers ensure the scalability, storage, and connectivity needed for AI workloads, enabling real-time data processing and supporting applications like machine learning, deep learning, and AI-driven services.
Noting the strong demand for data centers, analysts at Oppenheimer believe there's a shortage of infrastructure, which will possibly lead to capacity constraints in 2025. For investors in search of data center stocks to play the AI trade, here are three analyst-approved names to consider now.
#1. Cogent Communications
Founded in 1999, Cogent Communications (CCOI) is a leading provider of Internet connectivity services, primarily focused on wholesale and enterprise markets. Cogent also operates a number of data centers, offering colocation and other data center services to its customers. Its market cap currently stands at $4.03 billion.
Cogent stock is up 8.2% on a YTD basis, and offers a dividend yield of 4.79%, backed by over a decade of consistent growth.
In the most recent quarter, Cogent reported revenues of $260.4 million, up 8.6% from the previous year. However, the company reported a loss of $0.68 per share, as operating expenses shot up to about $311 million from $274.4 million in the prior year. However, losses came in much lower than the consensus estimate of $1.26 per share.
On the liquidity front, the company bolstered its coffers by exiting the quarter with a cash balance of $384.4 million, compared to its short-term debt levels of about $83 million.
Cogent's extensive network and over 20 years of expertise position it as a strong player in the data center market. Along with offering colocation services, Cogent operates several data centers, adding to its appeal for customers seeking reliable data solutions.
The company enjoys a strategic advantage with its unique routes, 90% of which are exclusively used by Cogent. This allows for quicker provisioning and higher internet speeds due to low congestion, enhancing its competitive edge with faster, low-latency connections.
Additionally, Cogent's acquisition of Sprint Communications has introduced new growth opportunities. By adding Sprint’s long-haul fiber routes connecting key U.S. cities, Cogent can provide critical high-capacity connections, particularly in its optical transport and wavelength services. The integration of Sprint’s assets not only strengthens Cogent’s offerings but also expands its customer base, positioning the company for further growth in the wavelength service market.
Analysts remain cautiously optimistic about Cogent stock, which has an average rating of “Moderate Buy.”
#2. DigitalOcean
DigitalOcean (DOCN) was founded in 2012. It is a cloud infrastructure provider that offers a simple and affordable way for developers and businesses to build, deploy, and scale applications. The company has a strong developer community, which provides support, resources, and collaboration opportunities. The company's market cap is currently at $3.74 billion.
DOCN stock is up 12.4% on a YTD basis.
DigitalOcean had a strong showing in Q2, with both revenue and earnings surpassing estimates. Revenues of $192.5 million grew 13.3% from the previous year, while earnings rose by 10.6% in the same period to $0.48. EPS came in ahead of the consensus estimate of $0.39, which marked the fifth consecutive quarterly earnings beat by DOCN.
Further, the average revenue per customer, a key operating metric, increased by 9% on a YoY basis to $99.45, as the company released 24 new product features throughout the second quarter.
Net cash from operating activities reached $138 million in the quarter, rising from $100.4 million in the year-ago period, and aiding the company in closing the quarter with a healthy cash balance of $443.1 million - much higher than the short-term debt of $74 million.
DigitalOcean's competitive edge stems from its focus on simplicity, catering specifically to small and medium businesses, developers, and startups. The company's strategy revolves around acquiring these customers at a low cost to upsell as they expand. With 16 data centers across North America, EMEA, and APAC, DigitalOcean allocates approximately 17% of its revenue to capital expenditures to support this growth.
The platform’s user-friendly interfaces, detailed documentation, and transparent pricing models make it easy for businesses and developers to deploy and scale. Moreover, its investments in scale and infrastructure allow DigitalOcean to offer competitive pricing without hidden fees or complicated billing, further strengthening its appeal in a competitive market.
Overall, analysts have deemed DOCN stock a “Moderate Buy.”
#3. Equinix
We conclude our list with Equinix (EQIX). Equinix was founded in 1998 and is a global leader in data center colocation and interconnection services. The company's data centers are designed to facilitate interconnection between businesses, allowing them to connect to their customers, partners, and cloud providers.
Valued at a sizeable market cap of $84.57 billion, EQIX stock is up 11.2% on a YTD basis. The stock also offers a dividend yield of 1.91%, which it has grown at a rate of 12% over the past five years.
The most recent quarterly results for Equinix came in ahead of Wall Street's expectations. With revenues of $2.16 billion, the company increased its topline by 7% from the prior year. Earnings rose by an even higher margin at 43% to come in at $3.16 per share, easily outpacing the consensus estimate of $2.66.
Over the past 10 years, EQIX expanded its revenues and earnings at attractive CAGRs of 13.34% and 22.19%, respectively.
Notably, the company is actively expanding its global presence, with 54 major projects currently in progress across 36 markets in 24 countries. These initiatives include 15 xScale projects, which are set to provide over 11,000 cabinets of retail capacity and more than 30 megawatts of xScale capacity by the end of 2024. This strategic expansion underscores the company's commitment to meeting the growing demand for scalable data infrastructure solutions worldwide.
Additionally, as the company scales up its operations, its cash flow-generating capabilities are also increasing. In the June quarter, Equinix reported net cash from operating activities of $912 million, up from $741 million in the year-ago period. Overall, the company closed the quarter with a cash balance of about $2 billion.
Equinix's operational strength and financial prowess have cemented its position as a global leader in digital infrastructure. Having converted to a REIT in 2015, it is now the largest publicly listed data center REIT, focusing not only on land leasing for data centers but also offering services like interconnection (via the Equinix Cloud Exchange Fabric), colocation, technical support, and optimization services.
The company has established significant relationships with top-tier clients such as Alibaba (BABA) Cloud, Amazon (AMZN) Web Services, Microsoft (MSFT) Azure, Oracle (ORCL) Cloud Infrastructure, and Alphabet's (GOOG) Google Cloud. Platform Equinix provides unparalleled access to these global cloud service providers, positioning Equinix as a key partner for hyperscalers. By linking with over 2,000 networks and 4,800 enterprises within its established retail/IBX data centers, Equinix has created an integrated system that benefits cloud, network, and enterprise customer segments. This integrated ecosystem makes further expansions, whether in physical data center capacity or digital infrastructure interconnections, smoother and mutually beneficial for stakeholders of varying sizes.
Analysts are quite bullish about Equinix, which has an average rating of “Strong Buy."
