Understanding the Lucrative AI Data Center Arena
The backdrop of capital markets history is teeming with illustrations of how a sweeping megatrend can elevate not only the core participating companies but also sectors orbiting around the epicenter. Just as the gold rush era saw more than just miners benefitting—think of Nvidia’s chips as the “picks and shovels” of the artificial intelligence (AI) revolution—massive chips are not dormant relics in the basement of tech giants.
These technological powerhouses reside in specialized data centers, representing a niche industry on the cusp of a boom for investors. As AI’s burgeoning impact is anticipated to inject a monumental $15.7 trillion into the global economic bloodstream by 2030, data centers stand poised to reap the rewards. According to real estate consultancy firm JLL, the demand for AI is set to surge, propelling data center storage capacity from 10.1 zettabytes in 2023 to a colossal 21.0 ZB by 2027, boasting a hefty CAGR of 18.5% over five years. Adding to the fervor, a forecast projects the addition of 120-130 hyperscale data centers every year for the next decade.
Delving into Promising Passive Income Picks
Given this expansive market landscape, let’s shine a spotlight on two data center picks nestled within the real estate investment trust (REIT) realm. These selections not only offer growth potential fueled by AI but also a steady stream of passive income via regular dividends.
#1. Equinix
With a foundation dating back to 1988 and headquartered in Redwood City, Equinix (EQIX) is a pivotal player providing colocation space, interconnection services, and cloud computing solutions. Serving as a neutral nexus for diverse networks and cloud providers, Equinix boasts the world’s largest interconnected data center platform with a presence in over 210 data centers across 55+ major metros in 25+ countries. The company currently flaunts a market capitalization of $76.4 billion.
Although EQIX stock has been lackluster in 2024, offering a flat YTD performance, the REIT presents a dividend yield of 2.01%. Notably, Equinix has consecutively raised its dividend for nearly a decade.
The first-quarter performance showcased Equinix’s 6.5% revenue uptick to $2.13 billion, although Funds from Operations (FFO) saw a marginal 1% decline to $5.81 per share. Despite the slight FFO dip, adjusted FFO (AFFO) outperformed expectations at $8.86 per share. The company’s unbroken streak of 85 consecutive quarters with positive revenue growth sets it apart in the market.
Equinix has solidified its stance as the largest data center REIT globally, occupying a more than 40% market share in major cloud platforms such as Amazon’s AWS, Microsoft’s Azure, Alphabet’s Google Cloud, and Oracle. The center of its revenue gravity revolves around enterprises with annual revenues exceeding $1 billion and owning more than 30 data centers.
#2. Digital Realty Trust
Established in 1994 and headquartered in San Francisco, Digital Realty Trust (DLR) stands tall as a prominent name in the realm of data center REITs. Specializing in owning, acquiring, developing, and operating data centers worldwide, the company leases out space and related services to businesses in need of robust IT infrastructure. With a solid market capitalization of $49.8 billion, Digital Realty Trust commands attention.
Noteworthy for its 20.6% YTD stock surge, DLR offers an enticing dividend yield of 3.06%, supported by a consistent payout track record spanning 15 years.
In the recent quarter, while FFO trumped estimates, revenues fell short of the mark. Revenues for Q1 landed at $1.3 billion, marking a 1% decline from the prior year. However, core rental revenues edged up by 2.7% to $894.41 million in the same period. Core FFO per share saw a marginal rise to $1.67, exceeding the consensus estimate of $1.62.
Digital Realty’s cash net operating income surged by 3.8% year-on-year to $722.5 million, bolstering its cash reserves significantly. Exiting the quarter, the company possessed a cash and cash equivalents balance of $1.2 billion, a substantial jump from the prior year’s $131.4 million.
Analysts’ views on DLR stock are mixed, with a “Moderate Buy” consensus. The stock trades at a premium to its mean target price of $154.09, signaling a potential upside of about 14% from current levels, with a Street-high target price of $185.
