AI demand for data centers boosts Digital Realty's prospects, stock wins upgrade

By Steve Gelsi

JPMorgan ups data center owner to outperform as a 'substantial beneficiary of cloud and AI demand for data center capacity'

Digital Realty Trust Inc.'s stock rose Friday after JPMorgan Chase analysts upgraded the data center owners to outperform from neutral on an expected increase in demand for cloud and artificial intelligence, or AI.

Digital Realty Trust (DLR) moved up by 2.4% after JPMorgan Chase analyst Richard Choe lifted his price target on the stock by $25 to $175 a share and bumped up his rating from neutral.

With available and future capacity in northern Virginia and elsewhere, the company should improve its funds from operations per share (FFOS) with healthy demand for its data centers, Choe said.

"Investors have been frustrated with the company's lack of core funds from operations per share, but we believe 2025 will be a year of strong revenue and adjusted earnings before interest, taxes, depreciation and amortization growth," Choe said.

In early May, Digital Realty Trust reported highest bookings quarter in its fiscal first quarter, along with "strong" renewal volume and pricing, he said.

"Data center demand is robust and the positive pricing environment could last for multiple years," Choe said. "Management noted half its bookings last quarter were AI related and we see the company winning more deals going forward."

Also last month Digital Realty raised about $1.6 billion in equity to fund more development and pay down debt.

"Digital Realty Trust is well positioned with its global portfolio of high density purpose built cloud data center portfolio and new development," Choe said.

Overall data center demand prospects also remain strong, he said.

JPMorgan Chase analysts currently project average data center demand to be up to 70% higher than supply on a global basis, even as the industry faces challenges of building more data centers.

Collectively, the sector faces "constraints from available land, zoning and permitting issues, power generation and transmission bottlenecks, higher equipment costs and longer delivery times, and higher labor costs with the overhang of a higher cost of capital versus a few years ago," Choe said.

At last check, Austin, Texas-based Digital Realty Trust operated more than 300 data centers in 50-plus metropolitan areas in more than 25 countries.

Among other ratings moves on Digital Realty Trust, Jefferies on Thursday included the stock on its global best ideas list of 21 stocks.

"Market rents have been rising over the past year, with DLR's achieved rents on new leases up more than 80% since bottoming nearly two years ago,." Jefferies analysts said.

Digital Realty Trust's stock is up 13.2% so far in 2024, below the 15.2% rise by the S&P 500 SPX.

-Steve Gelsi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

06-28-24 1247ET

Copyright (c) 2024 Dow Jones & Company, Inc.