The AI revolution has fueled an unprecedented boom in data center demand, with companies like Digital Realty (DLR), Vistra (VST), and Equinix (EQIX) benefiting from skyrocketing infrastructure investments. However, a recent report from TD Cowen suggests that this growth might not be as limitless as many investors once believed.
According to TD Cowen, Microsoft (MSFT) canceled several leases for U.S. data center capacity. In a research note on Feb. 21, analysts from the investment firm stated that the tech giant canceled leases with “at least two private data center operators” in the U.S., totaling a few hundred megawatts. This sparked wider concerns about whether it may be securing more AI computing capacity than it will need in the long run.
“Our checks indicate that in some situations, Microsoft is using facility/power delays as a justification for the termination,” the analysts wrote, adding in a separate note last Monday that the company was “strongly refuting” any claims of changes to its data center strategy. Notably, Microsoft stated that it remains committed to its plan of allocating over $80 billion of its cash to capital expenditures. However, the company acknowledged that it “may strategically pace or adjust our infrastructure in some areas.”
In this article, we will explain why Microsoft’s recent actions should serve as a wake-up call for investors in DLR, VST, and EQIX, and discuss why it might be a prudent time to consider taking profits on these stocks. With that, let’s dive in!
Data Center Stock #1: Digital Realty Trust
Digital Realty Trust (DLR) is a top global provider of data center, colocation, and interconnection solutions. It is a REIT that owns and manages large facilities where enterprises can store and manage their data and IT infrastructure. Essentially, it provides the critical physical infrastructure that supports AI technologies. DLR is the 6th largest REIT in the U.S., with a market cap of $53.9 billion.
Shares of the data center-focused REIT have been under pressure this year, partly due to the DeepSeek correction and concerns over Microsoft’s cancellation of some AI data center leases. DLR’s stock is down more than 12% year-to-date.
Companies like Digital Realty Trust may continue to face near-term pressures amid news of lease cancellations by Microsoft. As a REIT, DLR primarily focuses on leasing space to businesses, including cloud service providers, enterprises, and telecommunications companies. It earns rental revenue through long-term leases, which are generally designed to ensure stable and recurring income. With that, if the trend of AI data center lease cancellations continues industry-wide, it could directly affect DLR’s business model, potentially leading to lower rental revenues. It is also worth noting that while demand for data centers remains robust, as evidenced by the company’s solid backlog and a favorable pricing environment, full-year revenue guidance fell short of analysts’ expectations.
On Feb. 13, Digital Realty posted mixed Q4 results and issued soft 2025 revenue guidance. Its total operating revenues grew 5.1% year-over-year to $1.44 billion, missing Wall Street’s consensus by $20 million. Rental revenues stood at $958.9 million, up 8.2% year-over-year. Core FFO per share stood at $1.73, beating expectations by $0.02.
Regarding additional positives in the report, Digital Realty Trust reported stronger re-leasing spreads of +4.7%, benefitting from market supply tightness. This is in addition to a higher base rent per square foot at $243, up 46.3% year-over-year, and a base rent per kilowatt at $211, up 21.9% year-over-year. These figures highlight the ongoing unmet demand for data center capacity. In addition, DLR secured $100 million in new leases during Q4, driven by a record $76 million in bookings in its 0-1 megawatt plus interconnection segment, surpassing the previous quarter’s record by 16%. Finally, the company’s strong backlog of $797 million further suggests potential growth ahead.
Meanwhile, the REIT has managed to significantly improve its leverage, which is a very positive development. In the latest quarter, its net debt-to-adjusted EBITDA ratio was 4.8x, down from 5.4x in the previous quarter and 6.2x in the same quarter last year.
DLR’s full-year revenue guidance, however, seemed to disappoint analysts. The firm said it expects total revenue for 2025 to range from $5.8 billion to $5.9 billion, whereas analysts had anticipated $6.13 billion. Its 2025 core FFO is projected to be between $7.05 and $7.15 per share, reflecting 5.6% year-over-year growth at the midpoint. Following the Q4 report, analysts tracking the company have revised their forecasts, now predicting 2025 revenue of $5.94 billion and core FFO per share of $7.06. This represents year-over-year growth of 6.87% and 5.15%, respectively.
In terms of valuation, DLR looks quite expensive. The stock has a forward Price/FFO ratio of 22.16x, representing a premium of over 61% compared to the sector average. Typically, a valuation premium can be justified when a company is growing faster than its peers. In the case of DLR, its key growth metrics are not significantly better than its peers, providing little margin of safety.
Another important point is that although the company’s FFO has grown over recent years, its dividend hikes have been minimal over the last three years, which might not appeal to dividend-focused investors. Shares of DLR currently yield a dividend of 3.12%, well below the sector average of 4.65%. Notably, DLR has also substantially diluted shareholder value by issuing new shares over the past several years.
Despite potential industry headwinds from AI data center lease cancellations, Wall Street analysts remain optimistic about DLR stock, assigning it a consensus “Moderate Buy” rating. Out of the 27 analysts providing recommendations for the stock, 19 rate it as a “Strong Buy,” one advises a “Moderate Buy,” six give a “Hold” rating, and one considers it a “Strong Sell.”
Data Center Stock #2: Vistra
With a market cap of $45.3 billion, Vistra (VST) stands as one of the top retail energy producers in the U.S., boasting a capacity of approximately 41 gigawatts driven by its diverse portfolio of nuclear, natural gas, coal, and solar power generation, in addition to hosting one of the world’s largest utility-scale battery projects.
After a stellar 2024, VST stock has been quite volatile so far this year. The stock initially surged to a new all-time high in late January before wiping out all its year-to-date gains due to the DeepSeek selloff. It then staged a solid rebound, but concerns about the AI narrative contributed to recent losses, leaving the stock down 10% YTD.
Independent power producers with nuclear generation capacity have experienced unprecedented gains over the past year, driven by strong expected demand from AI data centers. Notably, a slew of technology companies, including Microsoft, have opted for nuclear power due to its reliability and zero-carbon emissions, aligning with their climate commitments. With that, recent news of Microsoft canceling some AI data center leases sent shockwaves through the nuclear energy sector, with Vistra being particularly affected, given that AI data center demand is one of its three key growth drivers. It’s also important to note that investors have become increasingly sensitive to any indications that AI data center demand might diminish, especially after the emergence of DeepSeek, which suggested that tech firms could develop AI products using less power.
On Feb. 27, Vistra Corp. plunged over 12% despite reporting solid Q4 results. The company reported a total of $17.22 billion in operating revenue for 2024. Analysts had expected full-year revenue of $17.79 billion. VST reported net income of $490 million for the quarter, a significant improvement from a $184 million loss in the same period last year, surpassing Wall Street’s expectations.
Meanwhile, Vistra’s quarterly adjusted EBITDA more than doubled to $1.99 billion from $965 million in the year-ago quarter, comfortably beating expectations. This increase was driven by higher income across most segments. Also, its net debt was below 3x adjusted EBITDA at the end of 2024, and further deleveraging is anticipated in 2025 and 2026. In addition, the company’s balance sheet remains solid, ending Q4 with a total available liquidity of approximately $4.1 billion.
However, the stock likely faced selling pressure post-earnings due to lukewarm guidance for 2025 and, more alarmingly, projections of flat EBITDA for 2026, which contributed to fears of a decline in data center demand. The company reaffirmed its FY25 guidance for ongoing operations adjusted EBITDA, projecting between $5.5 billion and $6.1 billion, with the guidance midpoint slightly exceeding the $5.66 billion earned in 2024. Major concerns emerged after CFO Kristopher Moldovan expressed confidence in a 2026 adjusted EBITDA midpoint of over $6 billion, signaling essentially flat year-over-year growth and falling short of expectations.
According to Wall Street estimates, VST is expected to post a 14.57% year-over-year drop in its GAAP EPS to $5.98 for FY25. At the same time, analysts anticipate a 13.90% year-over-year increase in the company’s revenues to $19.62 billion.
From a valuation perspective, Vistra still appears overvalued despite the recent drop. The company’s forward EV/EBITDA ratio stands at 11.33x, which is higher than the sector median of 11.09x and its five-year average of 8.54x.
Still, Wall Street analysts are highly optimistic about Vistra stock, awarding it a consensus “Strong Buy” rating. Out of the 12 analysts covering the stock, 11 recommend a “Strong Buy,” and one gives a “Hold” rating.
Data Center Stock #3: Equinix
Valued at a market cap of $88 billion, Equinix (EQIX) has been a leading provider of digital infrastructure services for nearly 25 years, specializing in data centers, connectivity, and digital real estate, and more recently transitioning into a REIT. It operates 268 data centers located in various countries around the world. EQIX is among the largest publicly traded data center REITs in terms of market cap.
Shares of the digital infrastructure REIT have dropped roughly 4% on a YTD basis.
The EQIX business model centers on providing a diverse array of data center solutions to various clients, including cloud service providers, IT companies, content providers, and, to some extent, financial institutions. Essentially, the company acts as a digital landlord, owning data centers while also offering extensive services to its clients. They include operational support, physical and cybersecurity, and reliability enhancements to ensure seamless client operations. With that, news of lease cancellations by Microsoft impacted EQIX in the same manner as it did DLR. If this trend persists across the industry, it could directly affect the REIT. The AI boom was anticipated to continue driving unprecedented demand for electricity and data center space; however, recent developments have introduced new variables that may affect the pace of this growth.
On Feb. 13, EQIX dropped more than 1% after reporting mixed Q4 results and providing weak revenue guidance for both Q1 and FY25. Equinix’s revenue advanced 7.1% year-over-year to $2.26 billion, primarily due to strong growth in recurring revenue.
Its revenue growth can be linked to capital expenditures for data center REITs, with Equinix’s CapEx totaling approximately $1 billion in Q4. About 65% of its CapEx budget was allocated to America, indicating management’s confidence that this market will continue to see rapid demand growth for their services. However, it’s also worth noting that in 2024, Hindenburg Research published a short report on EQIX, highlighting ongoing CapEx related to modernizing its data center portfolio. EQIX is an old REIT with many legacy assets that require upgrades to meet the standards of a modern data center operator, making CapEx a material concern for EQIX. Additionally, there is the risk of increasing competition. GenAI will require data centers with higher rack density and advanced liquid cooling systems, meaning many existing facilities may not meet these demands. As a result, numerous companies are already making substantial investments to build new AI data centers.
Moving on to profitability, Equinix posted an AFFO per share of $7.92, up 9% year-over-year. Its adjusted EBITDA grew 11% year-over-year to $1.02 billion. EQIX also maintains a solid balance sheet, featuring a blended borrowing rate of just 2.5% and available liquidity of $7.5 billion. Additionally, the REIT’s net leverage of 3.4x remains low both in absolute terms and relative to its peers.
Looking ahead, management anticipates 2025 revenue to be between $9.033 billion and $9.133 billion, and Q1 revenue to range from $2.191 billion to $2.231 billion, both figures falling well below consensus estimates. It also expects 2025 adjusted EBITDA to be between $4.386 billion and $4.466 billion, with the midpoint falling short of consensus estimates. At the same time, AFFO per share for the year is projected to be between $36.69 and $37.51, exceeding estimates.
Analysts tracking the REIT forecast a 25.79% year-over-year increase in its FFO to $27.06 per share for FY25, with revenue estimated to grow 5.09% from the previous year to $9.19 billion.
In terms of valuation, EQIX does not look appealing. The stock’s forward Price/FFO ratio stands at 33.43x, well above the sector average of 13.73x.
EQIX also pays dividends and has recently raised its quarterly dividend by 10% to $4.69 per share, resulting in a forward yield of 2.06%. This falls significantly below the average sector yield, making it less attractive to income-focused investors.
Still, Wall Street analysts have a consensus rating of “Strong Buy” on Equinix stock. Among the 27 analysts covering EQIX, 22 recommend a “Strong Buy,” one suggests a “Moderate Buy,” and four assign a “Hold” rating.
